ROMANIA Reimbursable Advisory Services Agreement on Sustainable Heating and Energy Efficiency Support for the City of Timisoara (P176373) OUTPUT No. 2: Draft Integrated District Heating and Energy Efficiency Strategic Plan September 2022 PRIMĂRIA MUNICIPIULUI TIMIȘOARA Disclaimer This report is a product of the staff of the World Bank. The findings, interpretation, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. This report does not necessarily represent the position of the Municipality of Timisoara. Copyright Statement The material in this publication is copyrighted. Copying and/or transmitting portions of this work without permission may be a violation of applicable laws. For permission to photocopy or reprint any part of this work, please send a request with the complete information to either: (i) the Municipality of Timisoara (b-dul C.D. Loga, nr. 1, Timisoara, Romania); or (ii) the World Bank Group Romania (Vasile Lascăr Street, No 31, Et 6, Sector 2, Bucharest, Romania) This report has been delivered under the Reimbursable Advisory Services Agreement on Sustainable Heating and Energy Efficiency Support for the City of Timisoara signed between the Municipality of Timisoara and the International Bank for Reconstruction and Development on July 13, 2021. It corresponds to Output 2 under the above-mentioned agreement. 2 Abbreviations ANRE Autoritatea Naţională de Reglementare în domeniul Energiei / Energy regulator BAU Business As Usual BRUA Bulgaria-Romania-Hungary-Austria (pipeline) CHP/CET combined heat and power DH district heating EBITDA Earnings before interest, taxes, depreciation and amortization EE energy efficiency EED EU energy efficiency directive EIB European Investment Bank ETS Emissions Trading System (EU) EU European Union GHG Greenhouse Gas GT gas turbine HC Housing Community IRR Internal Return Rate LCOE Levelized Cost of Energy LCOH Levelized Cost of Heat LIOP Large Infrastructure Operational Programme LTRS Long Term Renovation Strategy MAB multi-apartment building MDPWA Ministry of Development, Public Works and Administration MoE Ministry of Energy NECP National Energy and Climate Plan NRRP National Recovery and Resilience Plan nZEB nearly zero-energy building OP operational programme (EU) RES renewable energy sources RRP Recovery and Resilience Plan T&D Transmission and Distribution 3 Table of Contents Table of Contents .............................................................................................................................4 Executive Summary ..........................................................................................................................7 Section I: Context ........................................................................................................................... 12 A. General overview ......................................................................................................................... 12 B. Institutional setup and stakeholders............................................................................................ 14 C. Technical and market challenges ................................................................................................. 15 D. Legal framework analysis ............................................................................................................. 17 Responsibilities............................................................................................................................. 18 Governance .................................................................................................................................. 18 E. Environment and future EU directives/policy on emissions ........................................................ 20 Constraints on policy options ....................................................................................................... 21 EU available funding ..................................................................................................................... 22 F. Financial situation of DH in Timisoara.......................................................................................... 24 Tariffs............................................................................................................................................ 24 Subsidies ....................................................................................................................................... 25 G. Current demand for heating and energy efficiency in buildings.................................................. 26 Heat consumption in multi-apartment buildings connected to and disconnected from the DH system .......................................................................................................................................... 26 Previous building-renovation programs in Timisoara .................................................................. 27 Section II: Demand analysis ............................................................................................................ 30 A. Demand forecasting for district heating ...................................................................................... 30 B. Strategic market segmentation .................................................................................................... 31 Approach and basic assumptions ................................................................................................. 31 C. Economic optimization of the grid ............................................................................................... 36 Comparison of the alternative supply regimes ............................................................................ 41 D. Potential for energy efficiency ..................................................................................................... 41 Multi-apartment buildings and public buildings .......................................................................... 41 Section III: Technical options for district heating.............................................................................. 43 A. Availability of resources ............................................................................................................... 43 Gas ................................................................................................................................................ 43 Coal ............................................................................................................................................... 44 Geothermal .................................................................................................................................. 44 Waste to energy ........................................................................................................................... 45 Solar heating ................................................................................................................................ 46 Biomass ........................................................................................................................................ 47 Biofuels ......................................................................................................................................... 47 Hydrogen ...................................................................................................................................... 47 Electricity-based solutions ........................................................................................................... 47 Heat recovery from industrial processes ..................................................................................... 47 B. Technical options ......................................................................................................................... 48 Heat generation ........................................................................................................................... 48 District heating-level solutions..................................................................................................... 48 4 Option 1: Biomass/waste combined heat and power (CHP) plant with steam turbine generator – in place of existing coal/gas plant in South and Central DH plants ........................................................................ 48 Option 2: Gas engines ............................................................................................................................... 51 Neighborhood-level solutions ...................................................................................................... 52 Option 1: CHP based on gas engines (as is)............................................................................................... 52 Option 2: Heat pumps and solar PV system .............................................................................................. 53 Option 3: Geothermal plant ...................................................................................................................... 55 Option 4: Solar Thermal ............................................................................................................................ 56 Individual-level solutions: multi-apartment buildings ................................................................. 57 Option 1: Gas boilers ................................................................................................................................. 57 Option 2: Electric heaters .......................................................................................................................... 58 Option 3: Heat pumps ............................................................................................................................... 59 Option 4: Wood-pellet boilers for individual houses or public buildings ................................................. 59 Option 5: For individual households: Heat pump air-water and solar PV ................................................ 60 Levelized cost analysis.................................................................................................................. 60 Energy efficiency investments in MABs ....................................................................................... 63 Section IV: Assessment of sustainable district heating alternatives .................................................. 64 A. Recommended heating solutions................................................................................................. 64 B. Potential corporate alternatives for Colterm............................................................................... 68 C. Environmental impact screening and scoping ............................................................................. 69 D. Financial analysis .......................................................................................................................... 70 Financial analyses were carried out to assess the viability of the district level options and EE renovation program, and their impact on the performance of Colterm. As a first step, the financial analysis in a Business-As-Usual (BAU) scenario has confirmed the deteriorating trend in Colterm’s performance, in the absence of any rehabilitation or modernization investments. Annex F includes the detailed financial analysis summarized under this section. ...................... 70 Financial analysis in the “Business-As-Usual” (BAU) Scenario ..................................................... 70 Financial analysis for the technological shift to sustainable heating ........................................... 71 Option 1: Biomass/waste CHP................................................................................................................... 72 Option 2: Gas engines-based CHP ............................................................................................................. 72 Financial analysis of the renovation strategy for multi-apartment and public buildings ............ 73 Residential MABs....................................................................................................................................... 73 Public buildings.......................................................................................................................................... 74 Scenarios for building renovation programs’ implementation pace ........................................................ 75 Financial and institutional mechanisms for multi-apartment building renovations................................. 76 Impact of EE renovation program on the financial performance of Colterm ........................................... 81 E. Governance .................................................................................................................................. 81 The case for a broader approach ................................................................................................. 82 Top-down governance with a broad range of responsibilities .................................................... 83 1. Local government as planner and regulator ......................................................................................... 84 2. Local government as facilitator ............................................................................................................. 85 3. Local government as provider and consumer ....................................................................................... 88 4. Local government as a coordinator and advocate ................................................................................ 89 Corporate governance of a municipally owned DH company ..................................................... 91 Rationale for public ownership ................................................................................................................. 91 Ownership role of the public sector .......................................................................................................... 92 Competitiveness of SOEs ........................................................................................................................... 92 5 Equitable treatment of shareholders and other investors ....................................................................... 93 Stakeholder relations and responsible business ....................................................................................... 93 Disclosure and transparency ..................................................................................................................... 93 Responsibilities of the Board..................................................................................................................... 94 Section V: Recommendations and roadmap .................................................................................... 95 A. Final recommendations................................................................................................................ 95 Step-by-step approach to options analysis .................................................................................. 95 Preparation of a heating strategy ................................................................................................ 96 B. Roadmap .................................................................................................................................... 104 Annex A. Overview of Colterm’s current financial situation ........................................................... 107 Annex B. Overview of residential EE programs and instruments in the region ................................ 114 Annex C. TRANSGAZ gas infrastructure projects relevant to Timisoara ........................................... 116 Annex D. Colterm’s current plans for network modernization........................................................ 120 Annex E. Approach to demand analysis: Input parameters and assumptions .................................. 121 Annex F. Detailed financial analysis .............................................................................................. 126 6 Executive Summary The Municipality of Timisoara has entered into a Reimbursable Advisory Services Agreement with the World Bank with the objective of obtaining technical assistance in improving its planning capacity for the sustainable development of its district heating (DH) system and energy efficiency (EE) in buildings within its territory. In particular, the World Bank will develop a draft integrated DH and EE strategic plan, with recommended alternatives to improve the sector and a roadmap to deploy the strategic plan. The present document presents recommendations and a roadmap to improve heating services provision in the city of Timisoara. In order to do so, an advanced analysis of the current situation of heating provision in Timisoara was conducted, focusing on the actual efficiency and related cost of supply to the consumers, considering the heat losses in the network and substations. The analysis then proceeds to assess relevant technological options for optimizing the municipal heating supply and demand in a sustainable manner, including through implementation of EE measures in multi-apartment buildings (MABs), in line with Romania’s national Long-Term Renovation Strategy (LTRS). An assessment of steps and options to reform the governance of heating services is then presented, and the report concludes with final recommendations and a roadmap. It is worth noting that, although the analysis has sought to identify the most relevant options, the validity of each option presented needs further investigation due to (i) the limited information available for the analysis from the existing DH system and (ii) the need to carry out a detailed modeling of the heating system, which was beyond the scope of this work. However, the analysis already shows preliminary information and suggests directions for further analysis. The current situation of the DH system is characterized by a depleted infrastructure, increasing disconnections from the heating service and financial bankruptcy of the service provider, stemming from a legacy of inadequate oversight of DH services and a deficient institutional and governance framework. This situation has created a vicious circle, with the structural tariff imbalance resulting in insufficient investments in the network, worsening losses, decreased service quality and dissatisfaction of customers – who continue to disconnect from the system, feeding into a perpetual financial crisis for the company, recently aggravated by the spike in gas prices. A sine qua non condition to improve the provision of heating services in the City – independent of the technological solutions and investments needed – is therefore to reform the existing governance and institutional framework of DH. There are several institutional models available for managing DH in Timisoara, with different levels of public and private involvement, as numerous examples around the world have demonstrated. The most relevant option for Timisoara will have to consider local specificities and the legacy of the existing system, which include: the public ownership of assets of an extensive DH system suffering from declining household demand; an obsolete system architecture; and a large share (over 50%) of households, spread across the city, currently not connected to DH. These local characteristics limit the range of options available for structuring an appropriate governance architecture for heating in the city. In addition, in Romania, the municipality has a specific obligation to continue the provision of DH as a local public utility. The overall institutional restructuring – to optimize the heat provision for broader climate objectives using available local resources – would need to integrate such constraints. Establishing clear and transparent roles between the municipality and the DH company, in line with international best practices, should be a priority, regardless of the institutional structure chosen to manage DH services. A revision of the tariff structure should be carried out in parallel, accompanied by 7 measures to guarantee affordability for the most vulnerable households. The current insolvency process and the challenge to supply heat over the 2021/2022 winter season halted past efforts to reform the governance of the heating sector (and broader municipal energy sector). However, the insolvency procedure could in fact provide a window of opportunity for the municipality to reassess its plans for the best institutional structures that would need to be put in place for the implementation of a sustainable municipal energy strategy. Thus, the municipality must take the time to (i) consider how to streamline the activities of existing departments; (ii) consider which responsibilities should remain with the municipality itself and which functions should be “externalized” to new entities, including private sector firms; and (ii) define both the proper missions of each of the separate entities and their relationships (in terms of budget and accountability) with the municipality. Implementing strong corporate governance rules for all of the institutional entities to be set up as part of this review will be essential to contributing to the goals of the municipality; and building an arm’s-length, contractually sound relationship between the local administration and the company(ies) will provide invaluable insights into structuring any form of public, private, or public-private model for the entire system or parts of it. Best practices of corporate governance for State-Owned Enterprises should be followed. In parallel with the restructuring of the institutional and governance model for DH, technological solutions will have to be designed, tested, and scaled up to provide a more efficient and environmentally sustainable service to the city. The solutions to be implemented should be in line with EU regulations and objectives regarding renewables, GHG pricing, building energy efficiency, etc., mindful that the current framework could evolve given the unpredictability and potential extreme volatility of fuel prices. Therefore, the report proposes an “optionality approach”. The step-by-step methodology seeks to help the city identify technological options to provide more sustainable and efficient heating services. This approach consists in analyzing the DH distribution system from a commercial viewpoint (to identify underutilized substations), highlighting areas where the network needs upgrading (or where alternative supply options could be considered), and identifying clusters of high and low heat supply and the related cost of supply. A key aspect to consider when analyzing heat demand is the opportunity for energy efficiency investments. Launching an EE program for multi-apartment buildings (MABs) and public buildings would help to optimize demand for heating services in the city. In line with Romania’s LTRS, the analysis proposes the launch of a buildings renovation program. Three scenarios are proposed, under which all MABs and public buildings are renovated by 2030 (scenario 1), 2040 (scenario 2) or 2050 (scenario 3), using the same renovation package, and resulting in a reduction of energy consumption of approximately 50 percent. Timisoara should consider Scenario 2, which would support the renovation of all MABs by 2040 while limiting the burden on the municipal budget. Financing sources and schemes for the proposed program were assessed, with varying roles for the involvement of the private sector; in all cases, establishing an adequate institutional capacity within the municipality to oversee the program will be essential. The financial analysis carried out for the program confirms the positive impact of an EE renovation program on Colterm’s financial performance. At the supply level, in line with Timisoara’s objective of transitioning to more-sustainable heating technologies and reducing the carbon footprint of existing heating production units, various technologies are available with the potential to supply heating in a cleaner manner. Different fuels and renewable resources should be considered. There are uncertainties about the heating capacity of waste- to-energy solutions and the ability of heat recovery from industrial processes to make a significant contribution to heating supply. Likewise, implementing biomass and/or biofuel solutions would require obtaining biomass from sustainably managed sources – which are not currently available in sufficient 8 quantities to supply the heating capacity needed for the entire city. Green hydrogen may become a feasible solution in the future, but its cost and availability are uncertain and the technology and market still immature, in addition to logistical and technological issues. Analyzing both clean heating solutions and existing technologies based on conventional fuels for three levels of service provision (district level, neighborhood and individual) allows for the tailoring of options for optimizing services. The city-level solution for optimizing the provision of heating in Timisoara will likely consist in a combination of district level, neighborhood and individual solutions, depending on the city’s priorities and further analysis of cost and demand. For a central heating scheme, two main options have been analyzed: a biomass/waste combined heat and power (CHP) plant and several gas-engine-based CHPs. The biomass/waste CHP option would only apply to one of two DH plants (most likely South Plant) while gas-engine CHPs, while currently not financially viable due to high gas prices, should not be discarded due to their flexibility and relatively easy transition to cleaner fuels. At the neighborhood level, there are several options available, most of which would put the city on a more sustainable and environmentally sustainable path. However, given that some decentralized heat production plants are already equipped with CHPs based on gas engines, scaling up such technology would still help meet part of overall heating needs and could be completely decarbonized through the use of biofuels or even hydrogen in the near future. Another option could consist in installing heat pumps with solar PV. The presence of a local heat source, such as geothermal, could allow complete decarbonization of heat production while improving the efficiency of the process. Existing CHPs based on gas engines would be kept as-is and would not be replaced. The neighborhood plants equipped with hot water boilers (UMT, Dragalina and Polona) could initially be upgraded with heat pumps of similar size, while the existing boiler units could be used as standby units to cover peak demand during winter. The third neighborhood-level option could rely on geothermal energy, which has the advantage of providing constant (i.e. not intermittent), zero-emissions heating to neighborhoods located in the vicinity of geothermal sources. This option should be further investigated to confirm potential scale and location(s). Solar thermal heating could be an interesting option and has been implemented with success, for example, in some cities in Denmark. Finally, individual-level solutions could include gas boilers, electric heaters, heat pumps, and wood-pellet boilers for individual houses or public buildings. The levelized cost of heat (LCOH) was calculated for each of the different alternatives. The next step consists in comparing the levelized costs of heat (LCOH) of existing and alternative technologies to identify potential opportunities – at the district, neighborhood and individual levels. The analysis confirms the relative attractiveness of most alternative solutions versus the status quo. A financial analysis of each of the district-level solutions has been carried out, together with an assessment of the impact on Colterm’s financials of implementing the various options. The analysis confirms the financial viability of the proposed options. Gas-engine plants, however, face challenges due to the price of gas, as explained earlier. It is worth noting, however, that, whatever the technological solutions implemented for DH, unless a full restructuring of Colterm is carried out, key issues identified in the preliminary report will continue to prevail, including: non-cost-recovery tariffs which have led to under- investments in the system, an inefficient operation, a poorly capitalized balance sheet and legacy debts undermining the company’s financial performance. The recent spike in gas prices and increase in the carbon tax are also weighing on the performance of the company. . 9 The strategy for DH in Timisoara will need to consider various resources, technological solutions (on both the supply and demand sides), service providers and schemes, and governance structures to improve the quality of service and optimize costs and subsidies, focusing on users’ needs and integrating sustainability and resilience considerations. A more detailed collection of data, modeling and analysis will be needed to evaluate demand (to identify clusters of clients), network pipe diameters and heat distribution capacities. Several technological alternatives are available to the city that could provide more competitive and efficient heating to households and buildings. While further analysis is needed to confirm the viability of renewable energy-based solutions, these options would greatly contribute towards enhancing the city’s energy security, in a context where the availability of fossil fuels has become a challenge. Although this energy security benefit is not yet quantifiable, it should not be underestimated. To the same extent, in all cases, the renovation of buildings, seeking to optimize the use of energy in the buildings, is a win-win solution. The governing framework will need to be strengthened and centralized to optimize control and implementation of the EE program. A key immediate step is for the municipality to prepare a heating strategy, selecting an internal team with proven leadership, while collecting and analyzing data and launching pilot projects to test various delivery models. In the medium term, a broader consultation process with external stakeholders will be necessary to carry out an exhaustive energy-mapping exercise and create consensus around the strategy for DH. The draft roadmap on the next page summarizes the actions that the municipality should take in order to advance with the modernization and rehabilitation of heating services in the city. 10 Draft roadmap for the modernization of heating services in Timisoara Section I: Context A. General overview Timisoara has a municipal district heating (DH) system that supplies hot water and space heating to an estimated 55,000 households and about 900 public institutions and companies. The system is composed of two large generation plants (one gas-fired heat-only unit and one coal- and gas-fired combined heat and power (CHP) unit); three small neighborhood CHPs; three neighborhood heat-only-boilers; and a transport and distribution network. The key assets and parameters of the Timisoara DH system are summarized in Table 1 below. Figure 1. Map of Timisoara district heating system Source: Timisoara City Hall. 12 Table 1. Overview of district heating assets in 2021 Note: CET = Combined Heat and Power (CHP); CT = Heat Plant. Source: Authors. Currently, consumers who are connected to district heating fall into three categories: • Users connected to six neighborhood plants, through the distribution network related to each thermal power plant. Two of the five power plants are also equipped with thermal motors that produce electricity and heat in cogeneration. These consumers, which represent about 10 percent of total consumption, and the distribution networks to which they are connected are insulated from the rest of the distribution network and cannot be supplied by the main plants, CHP Centru (Center) and CHP Sud (South). • Users connected to the distribution network supplied by 117 thermal points (substations) connected to the transmission network. These consumers represent the majority of those connected and about 82 percent of total heat consumption. The transmission network is supplied with heating by the two large plants, CHP Center and CET Sud. CHP Center uses natural gas to produce heat. CET Sud uses coal (lignite) and natural gas to produce heat and electricity. • Users connected directly to the transmission network, which takes thermal energy from thermal modules (about 8 percent of consumption). 13 Figure 2. District heating system Note: CT = H; SACET = sistemele de alimentare centralizată cu energie termică (centralized thermal energy supply system); CHP = combined heat and power. Source: Colterm. B. Institutional setup and stakeholders The main stakeholders of the DH system are: (i) Colterm; (ii) the Municipality of Timisoara; (iii) the energy regulator, Autoritatea Naţională de Reglementare în domeniul Energiei (ANRE); (iv) consumers; and (v) suppliers. All DH assets are in the municipality’s ownership and operated by the municipal company, Colterm SA, under a delegation contract with the municipality since 2006, renewed in 2021. Though DH forms the bulk of Colterm’s activity (80 percent of revenues, plus some 2 percent from the generation of electricity in CHPs), the company also provides non-DH services as well, such as some minor sub-activities related to water and waste management (about 18 percent of revenues). For the operation of the DH assets, Colterm pays the municipality a relatively modest royalty fee. The company provides hot water and heating to clients, bills and collects tariffs from users, and receives subsidies from the municipal budget to cover losses from the provision of service (mainly tariff subsidies and network losses not recognized in tariffs). Table 2. Subsidies paid to Colterm and heating support, 2014-20 (000 lei) Subsidy 2014 2015 2016 2017 2018 2019 2020 State aid received from 47,705 52,712 49,435 53,314 51,256 71,667 79,072 local budget Support for heating (poor n/a n/a 774 550 331 181 107 households) from state budget Source: Timisoara City Hall, summer 2021. 14 The energy regulator, ANRE, analyzes and proposes a DH tariff based on requests from DH operators to cover justified costs and (at least in theory) ensure a modest profit. However, the local council has the final say in approving the local prices and tariffs to end-users, which can differ from ANRE’s proposal. The local council can also approve a tariff for households that is well below the regulated tariff, while requiring the municipality to cover the difference as a tariff subsidy (the mechanism is defined in Ordinance 36/2006 with amendments). As the municipality also owns the generation capacity, Timisoara has more control (and more direct accountability to the taxpayers) over local heat provision than other cities such as Bucharest or Constanta, where the ownership and responsibilities for DH network and generation are split with the central government. Customers of the DH services have been continuously disconnecting. The official number of connected households has dropped by about 43 percent since 1990 and 10 percent since 2015; but the number of residential users may in reality be much lower than the official 55,000 and possibly even below 40,000, according to Timisoara’s own estimates – because of informal, but effective, disconnections. C. Technical and market challenges Today, Timisoara’s DH system, built between the 1960s and the 1980s, is rather obsolete and no longer corresponds to current demand patterns. As in most urban centers in Romania, the heating demand shifted from industrial to household consumption following post-communist structural changes of the city. Most notably, the DH no longer provides steam and electricity to an industrial platform formerly located in the CET Sud’s proximity at the outskirts of the city and the residential heat is no longer a by- product. The system thus remains oversized and ill-fitted for the current demand. It should be noted that the system was originally built to deliver heat for about 100,000 households, whereas today fewer than half are connected. Currently, 44 percent of Timisoara households have some other type of heating. This results in inefficiencies in service provision and poor service quality – which, coupled with a backlog of investments and network maintenance, further accelerates disconnections and increases inefficiencies. This in turn has led to increasing budget pressures, as the municipality pays for the physical losses in the system while keeping the end-user tariff at affordable levels for households. The challenge for the city is thus to find a way to provide heating to consumers in a manner that is efficient and environmentally sustainable while keeping pace with city developments. Table 3. Network losses (% of total energy lost) Network Losses 2007 2008 2009 2010 2011 2012 2013 Transport 126,110 108,159 88,104 84,515 67,585 104,547 124,454 Distribution 107,550 86,031 94,353 93,245 120,739 102,229 125,240 Total 233,660 194,190 182,457 177,760 188,324 206,776 249,694 % of energy 22.2% 18.2% 17.8% 17.9% 19.8% 23.1% 29.8% lost 15 Network Losses 2014 2015 2016 2017 2018 Transport 111,852 108,069 102,782 134,960 132,430 Distribution 104,256 116,542 106,878 107,788 107,161 Total 216,108 224,611 209,660 242,748 239,591 % Energy lost 30.1% 30.4% 29.1% 33.2% 36.3% Source: Colterm The backlog of investments, deterioration of service quality, and disconnections have increased losses in recent years. Estimated losses averaged 20 percent for the 2007-12 period, then increased to an average of 30 percent for the 2013-17 period, before peaking at more than 36 percent in 2018. Based on the most recent estimates, technical losses for 2019 on the primary and secondary networks are 20.19 percent and 20.12 percent, respectively, representing a total loss of 36.25 percent – the same level observed in 2018. In recent years, Colterm and the city hall have made some investments in the DH system, mostly using European Union (EU) funds (plus some usual repairs funded by the local budget). The main investments were financed from EU funds in the 2007-13 cycle as part of the EU-funded Large Infrastructure Operational Program – mostly environmental and efficiency upgrades in generation, followed by investments in grids in the current 2014-20 operational programme (OP) cycle, but where implementation has only recently started. Starting the investments on the generation side, mostly to ensure compliance with the environment standards and less focused on efficiency improvements, has had the disadvantage that it did not take into account the decline in demand caused by disconnections, leaving the system oversized and not contributing to the reduction of losses highlighted above. Meanwhile, disconnections occurred because the service quality declined following delays in investments in the network. As in the case of building renovations (see under “Previous building-renovation programs in Timisoara” later in this section), the slow pace of investments in DH infrastructure, despite available funding, suggests capacity constraints for project preparation. Table 4. Investments in the District Heating System Investments Effect - Generation Modernization boilers 1,2,3 CET Sud Reduction of NOx, increase of efficiency Desulphuration boilers 1,2,3 CET Sud Reduction of SO2 Modernization hot water boilers 2,4 CET Centru Reduction of NOx, increase of efficiency - Grids Modernization pumping hot water CET Centru and CET Sud Increase in efficiency Distribution grids 60% modernized Transport grid 20% modernized Substations 60% modernized 16 Source: ISPE strategy study, Timisoara city hall docs for Competition Council. However, Timisoara, like other municipalities with DH, will likely require a series of government bailouts and a national policy concerning DH at the Ministry of Development, Public Works and Administration (MDPWA) and the Ministry of Energy (MoE). The bailout would be needed to deal not only with the current gas price crisis, but also with some of the past arrears and central-local government legacy issues which are outside of the scope of this analysis1. MoE is also expected to issue a national strategy for DH and support DH in the National Energy and Climate Plan (NECP) 2021-20302, while the MDPWA manages an investment program for DH that would need to be correlated with the NECP. In recent years the DH inefficiencies and Colterm’s financial difficulties strained the relationship with fuel suppliers, mainly EON, to a breaking point, culminating in lawsuits; EON finally discontinued supply in October 2021. Because of the insolvency and the company’s track record on defaulting payments, fuel suppliers provide gas on very short-term contracts – which are at spot prices – and payments in advance. The municipality’s ability to pay will depend on what funds it can get from taxes or intergovernmental transfers during this period while slashing other expenses to the bare minimum. Given also the soaring fuel prices in 2021 and 2022, and the increasing costs of CO2 emissions (which are expected to remain high in years to come3), the DH service in Timisoara is particularly vulnerable. As of this writing, it is unclear whether the municipality will increase end-user tariffs for the season, what the unit subsidy for household tariffs will be, and whether such a tariff increase would be one-off or be maintained after the gas crisis ends. The rationing of heat deliveries and the interruptions for a few days as EON discontinued gas supplies caused major consumer discontent, among both households and public institutions such as hospitals. This led to much negative publicity both for the city hall and for the DH system as a viable option for heating in the future. There is a high risk that the current winter season could lead to disconnections in 20224. Such disconnections are a critical uncertainty when assessing the feasibility of various centralized options for Timisoara. D. Legal framework analysis Heating is legally a municipal utility service, alongside water & sewage, public transport, public lighting, and waste management. The core legislation is Law 51/2006 on municipal utilities and Law 325/2006 on DH, with subsequent amendments. Timisoara city hall has already performed a thorough analysis of the legal requirements which covers all the important points of DH service provision; the legal basis for 1 E.g., potential legacy receivables from 2013-14 that Timisoara claims for heating from the central budget. As these issues must be settled regardless of Timisoara’s plan for the future provision of heating, they are not treated here. 2 https://energy.ec.europa.eu/system/files/2020-06/ro_final_necp_main_en_0.pdf 3 EU ETS future price was EUR32.96t on January 5, 2021 and EUR74.35t on September 5, 2022 (https://ember- climate.org/data/data-tools/carbon-price-viewer/). 4 This could, however, be mitigated by raising awareness that alternatives, such as individual gas boilers, may in exchange have been a very costly alternative in the current gas crisis (despite the recent utility bill support law). Also, it should be remembered that the current gas price shock reflects market concerns of gas supply cuts. While Colterm has the option to switch to coal to deliver some heat, individual gas boilers would simply not work in case of a supply cut. The current experience should also highlight the need for certain redundancies (planned “inefficiencies” in the DH system that would increase resilience in case of an emergency, such as dual fuels, some excess network capacity, etc.). 17 subsidies; regulation of the activity; and energy efficiency in buildings, including the roles and responsibilities of all actors involved5. For the purpose of this report, we focus on key elements not sufficiently emphasized in the above- mentioned analysis: • As defined in Law 51/2006, Articles 1 and 7, district heating represents a public service obligation for the municipality. This has several legal implications. First, it affects the way in which the DH service can be legally organized within the municipality and the governance structure, and allows the Competition Council to acknowledge the monopoly rights of Colterm for the provision of DH as the municipality seeks to renew the delegation contract in 2021. Second, it allows the municipality to provide subsidies to Colterm to continue its operations, based on OG 36/2006 and according to a state aid scheme approved by Order of MDPWA 1121/2014 with amendments, up to an annual threshold of €15 million, until 2023. Third, since heating is a public service obligation, heat provision cannot be simply discontinued by the municipality without clearly ensuring an alternative to taxpayers6. Thus, the city of Timisoara is legally bound to find a cost-effective solution to ensure access to households, public institutions and companies to heating that is also sustainable financially and environmentally. • Though legally a commercial entity (a company), the DH service is not fully aligned with best practices of corporate governance recommended by Law 111/2016. In 2021 the municipality began to implement some of the provisions of OUG 109/2011, which requires competitive selection of the management, but not all additional corporate governance provisions introduced in Law 111 were implemented. Although the governance reforms are currently on hold due to the Colterm’s insolvency, they should be examined after the company’s turnaround. Responsibilities In terms of clarity of responsibilities and accountability, the situation in Timisoara is favorable compared to other cities where the generation and network are split and managed by different authorities (generation – MoE, network – city hall, like in Bucharest or until recently Constanta). The local accountability for the provision of heat is also stronger than in cities where the ownership or administration of the company operating DH infrastructure is split (e.g. Bucharest, where the DH is under the intercommunity development association ADI Termoenergetica and all decisions must be taken with a vote in three local councils; or in Arad, where the DH company has a minority shareholder – the county council, which creates difficulties for accessing EU funds). As a result, Timisoara’s city hall measures concerning the provision of DH to the city are not directly constrained by external decision-makers. Governance The municipality extended the delegation contract with Colterm for DH service provision in summer 2021 and examined several governance forms for the service, ultimately opting for a commercial municipal company – a local state-owned enterprise (SOE). This was also the previous organization of the activity in recent years. In brief, Colterm is by law a fully commercial company owned by the municipality; it provides 5 The documentation prepared for the Competition Council to obtain the approval for the delegation of the DH service to Colterm in summer 2021 – Studiu de oportunitate, Chapter 3, p. 8-16. 6 See also the case of Galati, where the municipality decided to discontinue DH, but provided a subsidy – lei 3000 per household – for DH users to buy individual gas boilers. 18 the service based on rules issued by the municipality; it is accountable to a specialized department within the city hall; its activities are regulated by ANRE; and it operates the infrastructure while paying a royalty fee. Should the company be operated at arm’s length, the royalty would have to cover the depreciation of the entire infrastructure. Although Timisoara opted for a fully commercialized undertaking, in practice the relationships between the city hall and Colterm may not separate adequately managerial and governing functions. Colterm pays a royalty fee of about €60,000 per year for the operation of the DH generation and network; the assets, most of which are in the municipality’s books, are not periodically valued to assess and determine the real, market-based royalty that should be the base for the tariff calculation, regardless of the operator of DH7. The DH service is expected to require operational subsidies from the local budget in the foreseeable future to continue delivering heat to the consumers; though the DH is a public service obligation, the subsidization of its operation is meant to be temporary, until the DH becomes an economically sustainable activity following investments to enhance the system’s efficiency8. However, for the time being, there is no clear valuation of the public service obligation to provide commensurate compensation; mostly the municipality now bears all the inefficiencies of the system to allow it to continue DH operations, in the hope that the inefficiencies will reduce subsequent investments. 7 The justification for the extension of the delegation contract to the Competition Council suggests the same royalty would be paid by any other operator, e.g. a private concessionaire. 8 Ministry of Regional Development (currently Ministry of Development, Public Works and Administration) Order 1121/2014 (as amended) allows a transitional period of subsidies for the DH as a service of general economic interest (SGEI) without prior notification to the EC, up to a limit of €15 million. The scheme currently runs until 2023. All subsidies for DH, for losses on the network or difference between local price and price paid by households, must fall under the €15 million threshold; otherwise, the municipality (e.g. Bucharest) must notify the EC and attest that it is able to continue operation with this level of subsidy ). 19 Figure 3. Organization and fund flows to the district heating system Source: Timisoara City Hall, 2021. As explained in section I, Colterm is currently under an insolvency procedure. Legally, this process suspends most of the considerations on the governance of the company. However, it also provides the Municipality of Timisoara a window of opportunity to reassess the potential role of the company, the scope of its activities, the objectives that the municipality plans to achieve via a future institutional setup to implement the city strategy, and the future relationships (budgeting, accountability) between the municipality and various entities that could be set up. This will depend critically on the municipality’s plans for the sustainable heating of the city. The municipality must consider various options for institutional structures to choose the one that best fits the municipality’s overall strategy. The potential options for institutional structures are examined in Section IV. E. Environment and future EU directives/policy on emissions While heat supply should be economically and financially sustainable, Timisoara is also responsible for the climate and environmental sustainability of heating sector and the city’s policy options are constrained by EU policy on the subject. The EU seeks to achieve climate neutrality by 2050. For this reason, under the European Green Deal, in 2020, the EC increased the EU’s net greenhouse gas emissions reductions target to at least 55 percent by 2030. This section summarizes the two main, inter-related areas in which the new directions of EU policy have a direct relevance on sustainable heating and DH for Timisoara: directives 20 and regulations that limit the available policy options for heating and available financing for DH and energy efficiency in buildings. Constraints on policy options EU climate targets have become increasingly ambitious with the new Green Deal, which substantially restricts policy options in member states and limits public (not just EU) funding to measures that promote rather radical decarbonization. Heating options that involve individual gas boilers are increasingly discouraged, varying from discussions of a total ban on such boilers for new buildings (which would also be inconsistent with the requirement that all new buildings be “nearly zero-energy buildings” – nZEBs – from 2021 onwards) to be phased-out in existing buildings. This development is observed both at EU and member state level9. Moreover, it is also in debate at EU level the labeling of activities as “sustainable” according to the very recently introduced EU Taxonomy Regulation10. Previously, the regulation was designed only to provide general policy and funding guidelines, except for the National Recovery and Resilience Plans (NRRPs), where funding is granted based only on the taxonomy. This means that local and national authorities or companies are still allowed to undertake activities and support policies and investments that do not meet the strict criteria in the EU Taxonomy Regulation – for example, a local authority may be able to choose to finance from its own budget a heating solution that does not fall under the taxonomy. However, it is increasingly unlikely that such actions will be eligible for EU grants (such as from OPs) or funding from any EU-related mechanism – such as the Modernization Fund. For Timisoara, this limitation is critical given that the city hall is not likely to have other sources of funding except from the EU for investments needed to provide heat sustainably. In addition, each member state must make sure it will achieve nationally- committed targets – which means there will likely be certain conditions also in the allocation of national budgets and stricter national regulations. The EU policy – in particular the Fit-for-55 package – demands full decarbonization of the heating and cooling sectors by 2050, explicitly and implicitly supporting DH solutions that can better integrate renewables in cities. The key provisions relevant for sustainable heating are included in the recast EU Energy Efficiency Directive (EED) and Renewable Energy Directive (RED) in the Fit-for-55 package released in July 2021, which significantly raises the previous level of ambition. In brief, the combined provisions of the two directives require full decarbonization of heating and cooling by 2050 providing intermediate milestones (by 2025, 2030 etc.). By each milestone, an increasing share of heating and cooling must be covered from renewable energy sources (RES) or high-efficiency cogeneration, while the renovation of buildings must be accelerated to increase the energy efficiency of consumers. In addition, member states are required 9 See https://www.euractiv.com/section/energy-environment/news/eu-rules-out-banning-gas-boilers-aims-for- gradual-phase-out-instead. In Romania, the Minister of Environment, Waters and Forests has already announced the intention to issue legislation implementing a total ban of individual gas boilers for new buildings. 10 Waste-to-energy, for example: Environmental groups interpret it – in particular incineration – as unsustainable (https://zerowasteeurope.eu/2021/05/wte-incineration-no-place-sustainability-agenda/), whereas the industry itself now lobbies for it to be considered sustainable if the incinerated residual waste is non-recyclable in any other way and if the incineration is coupled with carbon storage (https://eswet.eu/a-sustainable-circular-economy-needs- taxonomy-criteria-for-residual-waste-treatment/). 21 to provide comprehensive assessments of district heating and high-efficiency cogeneration potential (which means an implicit assumption that the realization of the potential would be encouraged11). Measures for heating and cooling must be included in the NECPs, and heating and cooling policies must in turn be coordinated with the Long-term Renovation Strategy (LTRS) for buildings, approved in 2020, and explicitly mentioned in the NECP. The definition of energy-efficient district heating and cooling – which can be supported with state aid and EU funds – is also much stricter than in the original EED, with increasing shares of RES and high-efficiency cogeneration by 2025, 2030, etc. All new buildings must be "nearly zero-energy buildings" (nZEB) starting from 2021. In parallel, in 2020, the European Commission launched a new Strategy called "A Renovation Wave for Europe – Greening our buildings, creating jobs, improving lives". This strategy aims to double annual energy renovation rates in the next 10 years in Europe by prioritizing three areas: a) tackling energy poverty and the worst-performing buildings; b) renovating public buildings, such as administrative, educational and healthcare facilities; and c) decarbonizing heating and cooling. A number of EU funds are available to finance renovations works (see next section). To summarize, the effect of the Green Deal is that for cities above a certain population density such as Timisoara, sustainable heating will likely require a combination of centralized and decentralized (but building-level) solutions, in order to achieve their decarbonization goals. It is worth noting, however, that, in today’s very volatile environment, there are uncertainties regarding the future regulatory regime, with many European countries increasing coal-fired generation. EU available funding The stricter EU climate policy has two direct financial implications for sustainable heating in Timisoara: the increasing costs of CO2 emissions which would be paid by Colterm under the EU ETS scheme, and the availability of funding for investments clearly linked to decarbonization goals, e.g. from the Modernisation Fund for heat generation or OPs and the NRRP for energy efficiency in buildings. It should be noted that even just under the EU ETS, Colterm can get substantially more money for investments12 than it is liable to pay for CO2 emissions, provided the municipality and Colterm prepare and implement good projects. Additional funding is available from the current and future OPs and the NRRP, approved in September 2021. CO2 emissions from heat and power generation are managed under the European Emissions Trading System (EU ETS). The fourth phase of the ETS started in 2020, with enhanced targets for emissions reductions. Accordingly, the target to reduce greenhouse gas (GHG) emissions from the EU ETS sectors was increased to 61 percent by 2030 – an increase of 18 percentage points over the 2005 level of 43 percent. In line with EU objectives, Romania has defined its own national climate change targets in its NECP: it seeks to reduce GHG emissions by 43.9 percent in ETS sectors and 2 percent in non-ETS sectors by 2030. GHG emissions generated by Colterm are subject to ETS legislation, while the non-ETS target is relevant as it covers measures for energy efficiency in buildings (at least until 2026). 11 It should be noted that in Central and Eastern Europe (CEE) the share of DH is falling, whereas the trend in older EU member states is clearly towards increasing the share of DH. https://smartenergysystems.eu/wp- content/uploads/2019/04/4DH_2018_Aalborg_Duic_version_2.pdf 12 A summary of available sources of EU funding is available at: http://energie.gov.ro/finantari-sector-energetic/. 22 Revision of ETS legislation. On July 14, 2021, the EC adopted a series of legislative proposals (the Fit-for- 55 package) intended to define a path to achieving climate neutrality in the EU by 2050, including the 2030 revised target. The proposed changes to the EU climate legislation include the EU ETS and are under consideration by the European Parliament, the Council, the Economic and Social Committee, and the Committee of the Regions as per the ordinary legislative procedure. The new draft EU ETS Directive will apply for the period 2021-30 and is likely to increase Colterm's obligations under the ETS scheme. Specifically, the Commission proposes a one-off reduction of the overall emissions cap by 117 million allowances (“re-basing”), and an increase in the annual emissions reduction of 4.2 percent (instead of 2.2 percent per year under the current system). In addition, the ETS will likely be expanding to new sectors, including buildings – though only from 2026. Finally, the system of free allocation (which corresponded to 14 percent of Colterm's allowances in 2021) will be phased out after 2026, from a maximum of 30 percent to 0 at the end of phase 4 (2030). These obligations, however, are more than compensated for by the increased access to EU funding for decarbonization investments. Modernisation Fund. The EU’s Modernisation Fund has been established to support investments in 10 EU countries, including Romania, and has been operational since January 2021. It is funded by the auctioning of 2 percent of emission allowances as well as transfers of free allocations to this fund from countries like Romania. The EC estimates that Romania could access more than €10 billion under the Fund over the fourth phase of the ETS. The fund covers up to 100 percent of costs and focuses on the following sectors: (i) generation and use of energy from renewable sources; (ii) energy efficiency; (iii) energy storage; (iv) modernization of energy networks, including district heating, pipelines and grids; and (v) just transition in carbon-dependent regions, i.e., redeployment, re-skilling and upskilling of workers, education, job- seeking initiatives and start-ups. Member States select the investments they wish to submit for Modernisation Fund support, which are then reviewed by the European Investment Bank (EIB), an Investment Committee and the EC throughout the year. In September 2021, the MoE sent to EIB a list of proposed projects amounting to €492 million – for the construction of power lines for Transelectrica, the electricity transmission system operator (supporting transport of electricity from renewable energy sources); and for photovoltaic parks at CE Oltenia coal mining sites, on ash and slag deposits at several locations. The Romanian government has not yet issued guidelines to apply for the Modernisation Fund competitively and has not yet announced the date for a competitive call for proposals. However, it is unlikely that projects in competitive sectors (e.g. electricity and heat generation) will be financed without a competitive scheme, given the EU state aid rules. For the time being, the MoE has compiled a tentative list of project proposals being developed for the Modernisation Fund, containing general details. Colterm has already proposed several projects under this list (these would, however, require feasibility study updates and the preparation of a new local heating strategy). Innovation Fund. The Innovation Fund, operational since 2020, finances projects in all EU countries that demonstrate innovative low-carbon technologies in renewable energy; energy-intensive industries; energy storage; and carbon capture, use and storage. The fund covers up to 60 percent of costs. Like the Modernisation Fund, it is funded by revenues from the auction of emission allowances from the EU ETS. On October 26, 2021, the EC launched a second call for large-scale projects (above €7.5 million), with a budget of €1.5 billion. It will close in March 2022. A second call for small-scale projects, with a budget of €100 million, is expected to be launched in March 2022. Projects apply directly to the Innovation Fund. Funds for building renovation13. The EU’s recovery instrument NextGenerationEU will make available an unprecedented volume of resources that can also be used to kick-start renovation of buildings. 13 https://www.mdlpa.ro/pages/pnrr 23 NextGenerationEU is supporting Romania's Recovery and Resilience Facility (approved in September 2021) with €29.2 billion in funding (€14.2 billion in grants, the rest in loans), 41 percent of which is targeted at climate-related expenditure, including building renovation and investments related to energy efficiency. National Recovery and Resilience Plan. Under the NRRP, Romania plans to allocate €855 million for phasing-out of coal and lignite power production, as well as €2.7 billion for energy efficiency of buildings, with funding (grants and loans) from the EC Resilience and Recovery Facility (RRF). All projects need to be fully operational by mid-2026. RePowerEU. Since the Russian invasion of Ukraine, the EU has renewed its focus on accelerating green transition and reducing dependency on Russian gas. The REPowerEU Plan, published on May 18, 2022, sets out measures to save energy, produce clean energy, and diversify energy supplies, and is backed by financial and legal measures to build the European Union’s (EU) new energy infrastructure and system. Member States are also encouraged to use fiscal measures to encourage energy savings, such as reduced VAT rates on energy efficient heating systems, building insulation and appliances and products. Romania will soon launch the preparation of its RePowerEU Chapter, which may include financing available to support more efficient heating systems. Regional Operational Program and Sustainable Development Programs. Following the adoption of the EU Cohesion Policy for 2021-27 (with a total budget of €392 billion), Romania will receive €31.5 billion out of which €6.75 billion for green transition. While detailed regional programs for the corresponding period are still under discussion between individual countries and the EU, budgets by subsectors have already been defined for Romania. Specifically, €2.3 billion have been allocated to improve the energy performance of residential and public buildings and to develop renewable energy sources and smart energy systems, which will include investments for DH modernization. Under the Large Infrastructure Operational Programme (LIOP) for 2014–20, €229 million was allocated for modernizing DH systems in cities. F. Financial situation of DH in Timisoara The main financial issues arise from weak operational performance (with high technical losses and inadequate reliability of service) and ineffective tariff-setting and compensation mechanism. This results in a very fragile financial situation for the DH system as a whole, characterized by operating losses, minishing equity and ballooning receivables. Annex A provides a detailed review of Colterm’s financial situation. Tariffs There are several issues related to tariffs and the process of tariff approval. Thus, when some of the DH cost elements increase (e.g. CO2 costs or gas prices), DH companies such as Colterm ask the regulator, ANRE, for a tariff adjustment. Very importantly, ANRE does not recognize all the losses on the transport and distribution network, but only a justified part of such losses (to stimulate efficiency). ANRE reviews the DH company’s request for a tariff revision and issues an opinion, but the actual tariff that will be applied to consumers must be approved by the local council. The local council approves the tariff for the city (which may be different, generally lower, than the tariff calculated by ANRE); this is called the “local price”. The local council may also approve a different tariff for households that is lower than the “local 24 price”. Colterm bills its non-household consumers at the “local price” and its household consumers at household tariffs, receiving a tariff subsidy from the municipality. Subsidies Financial gaps have arisen due to the calculation and timing of the compensation: • The time lag between the moment when the request for tariff adjustment is made and real costs for the season. For example, Colterm submitted a request for tariff adjustment based on prices at end-September 2021. Gas spot prices then increased in the first two weeks of October by 30 percent. But because this cost increase occurred “during the season” and was not anticipated at the time of the request, it is not recognized in the current season’s tariffs. • “Recognized” versus “effective” technological losses. ANRE does not recognize the full 36.25 percent of network losses, but only about 20 percent (which is in line with historical losses on the network in about 2010). The municipality is supposed to cover such losses. The value of the losses is a matter of some dispute between the company and the municipality. There are also time differences between the moment when the losses are actually incurred and when the municipality covers the payment (e.g. technological losses for 2020 were approved in December 2021 and the municipality paid half of the amount). • The difference between household tariffs and “local price”. This is paid by the municipality as the bills are issued. (Timisoara municipality does not default on such payments like others, such as Bucharest). The table below illustrates a calculation of the real costs and various tariff elements. For the current FY2021, Colterm submitted a new demand for tariff revision following the sharp increase in gas prices, which doubled the total cost. If the household tariff is doubled to lei 416.2, the subsidy would also need to be doubled to lei 410.5. This covers only the subsidy for the tariff, but not the subsidy for the losses in the network. Table 5. Tariff approved and request for revised tariff, VAT included (lei/MWh) Approved tariff Estimate Op Yr 2019 Op Yr 2021 Real cost of heat during season n.a. 1400 Real cost of heat with all losses, at costs at beginning of season n.a. 1247 Regulated tariff (“local price”) 415.4 826.7 Household regulated tariff 208.1 410.5 Subsidy for household clients 207.3 416.2 Source: Colterm, own estimates However, the total cost of heat, including the “technical losses” not recognized by the regulator, would be closer to lei 1250 (which corresponds to total costs of producing all the heat, excluding gains from 25 electricity in cogeneration, divided by the heat that actually reaches the end-user after losses in the DH network). This value is calculated based on costs at the beginning of October. If during the season prices for gas increase further, this means additional losses for the DH – which will eventually have to be paid by the municipality. G. Current demand for heating and energy efficiency in buildings Potential gains from energy efficiency at the consumer level should be considered when assessing options for the DH system. This section describes the demand side of the heating and energy efficiency measures undertaken so far in buildings. Heat consumption in multi-apartment buildings connected to and disconnected from the DH system14 The total average annual heat consumption of all Timisoara building households, whether or not they are connected to DH, is 968,280 MWh; those connected to the DH systems consume 48% of this, or 66,916 MWh. (Even if households use individual gas boilers at the apartment level, they still reside in buildings that are connected to a DH system.) Based on Colterm customer data, 57.09% of users in DH-connected buildings have disconnected from centralized heating and installed individual gas boilers instead. Residential buildings account for around 91 percent of heat consumption, while non-residential buildings account for 9 percent, the bulk of which is consumed by public buildings (7 percent), as shown in Table 6. Table 6. Heat consumption in buildings supplied by DH Actual heating Actual heating Average heating Share consumption in consumption in consumption of total Heat consumers 2019 (MWh) 2020 (MWh) (MWh) (%) Households connected to DH 369 098 384 557 376 828 39 Households disconnected from DH using gas n.d. n.d. 501 364* 52 Public institutions 78 053 67 136 72 595 7 Companies 23 314 11 673 17 494 2 Sub-total – DH connected 470 465 463 366 466 916 48 Total 470 465 463 366 968,280 100 Note: n.d. = no data. * Estimate based on the Colterm data proportionally to the number of disconnected from DH users. Source: Starea economică, socială şi de mediu a Municipiului Timişoara, 2019 and 2020. As shown in Table 7, the total number of heat consumers is around 86,128, of which 37,822 are DH customers. Of the DH customers, 36,307 are households (most living in apartments), 1116 are companies 14 Based on average data from 2019-20. 26 and 399 are public institutions. The useful area of households connected to the DH is 2.43 million m2 (51 percent), of which 1.76 million m2 (36.9 percent) is the area of residential consumers. Average annual heat consumption (in kWh/m2) is estimated based on the average actual heat consumption as provided in Table 6 above. Table 7. Consumers: number, useful area and average heat consumption Average Share of Average heating total area size of consumption No. of useful 1 consumer per year Heat consumers consumers Useful area (m2) area (m2) (kWh/m2) Households 84,613 4,096,610 85.9% 48.4 214 • Connected to DH 36,307 1,757,834 36.9% • Disconnected from 48,306 2,338,776 49.0% DH using gas Public institutions DH 399 388,414 8.1% 973 187 Companies DH 1116 284,388 6.0% N/d N/d Sub-total DH connected 37,822 2,430,637 51.0% Total 86,128 4,769,413 100% Sources: Starea economică, socială şi de mediu a Municipiului Timişoara, 2020; Actualizarea strategiei de alimentare cu energie termică a Municipiului Timisoara 2016, COLTERM S.A.; Anexa 1, Tabelul nr. 10, Non-household consumers. Note: n/d = no data. The building sector provides significant opportunities for energy savings. Because heating accounts for more than 60 percent of energy consumption in buildings, most energy-saving potential is associated with thermal insulation and heat-loss reduction. In the residential sector, over 80 percent of buildings are more than 30 years old, which is reflected in their high heat consumption. The current level of heat consumption in Timisoara is estimated to be about 214 kWh/m2/year for households and 187 kWh/m2/year for public institutions. Previous building-renovation programs in Timisoara The total number of renovated multi-apartment buildings (MABs) was 117 in the period 2009-21, implying a pace of only 12 building renovations per year. The highest number of renovated buildings (41) was achieved in 2010; since then, the pace of building renovation has slowed down. Renovated buildings represent 11 percent of the total useful area of all housing (mainly MABs) connected to the DH system. Table 8. Renovated MABs by year, 2009-21 Number of Useful area of Average Year of renovated Number of renovated number of Average of useful renovation buildings apartments buildings (m2) apartments area (m2) 27 2009 18 564 36 965 31 2 054 2010 41 1568 111 059 38 2 709 2011 5 144 9 340 29 1 868 2015 22 952 56 405 43 2 564 2016 28 1339 79 828 48 2 851 2020 1 22 1 571 22 1 571 2021 2 151 9 362 76 4 681 Total 117 4740 304 530 41 2 603 Note: no buildings were renovated between 2017-2021 Source: “Situație cu blocurile reabilitate de PMT până în 2021” (Excel list). Most renovated buildings have four or fewer floors. Energy savings for buildings with more than four floors are higher, but the difference is not significant. Average heat savings were 74 kWh/m2/year, or 51 percent of the prior heat consumption before rehabilitation. Table 9. Renovated MABs, by building type Average of Average Average of heat No. of useful area number of savings Average heat Building type buildings (m2) apartments (kWh/m2/year) savings (%) More than 4 floors 36 4 351 70 80 55 4 or less floors 81 1 739 26 71 49 Total 117 2 516 39 74 51 Source: “Situație cu blocurile reabilitate de PMT până în 2021” (Excel list). The main wall materials of renovated buildings are concrete panels; as shown in Table 10, higher specific savings (in both absolute and percentage terms) are observed in brick buildings. Table 10. Renovated buildings by main material of the building Average energy Average Building No. of savings energy material buildings (KWh/m2/year) savings (%) Bricks 6 93 53 Panels 111 73 50 Total 117 74 51 Source: “Situație cu blocurile reabilitate de PMT până în 2021” (Excel list). 28 The average cost of renovating 61 MABs in 2009-2011 was €54 per m2 at current prices15. The average heat energy savings of 111 completed projects were 74 kWh/m2/year – a 51 percent reduction in heat consumption compared with the situation before rehabilitation. In the renovated buildings the following energy efficiency measures were implemented: • Thermal insulation of the facade – glazed part (done by replacing the existing exterior joinery/glass, including in building entrances, with thermal insulation/joinery) • Thermal insulation of the facade – walls part • Thermo-waterproofing of the terrace, i.e., the thermal insulation of the floor over the last level in cases where roof framing exists • The closing of balconies and/or loggias with thermally insulated carpentry, including the thermal insulation of guardrails • Thermal insulation of the floor over the basement. a) Thermal insulation of the opaque part of the facades; b) Replacement of the existing external sills, including block entrance, with heat- insulating equipment; it must be equipped with devices/slits/grills for ventilation and avoiding condensation; c) Closure of balconies and/or loggias with heat-insulating material, including thermal insulation of parapets or replacing them with PVC panels; d) Heating and moisture insulation on top of the building; e) Heat insulation of basement floor. • Additional works: repairs, surrounding cement, finishes etc. All renovated buildings were reported as having achieved energy performance class B. 15 Actual renovation costs in 2010 were on average €34 per m2; by 2021 this had increased by 59.56 percent, according to the Eurostat construction cost index. No information was available for projects completed after 2011. 29 Section II: Demand analysis A. Demand forecasting for district heating Colterm has prepared demand projections for Timisoara municipality based on expected disconnections by 2023, assuming that the disconnections will cease thereafter. Table 11. Heating: demand forecasts, 2021-26 (Gcal) Companies and public Year Households institutions Total 2021 324,325 81,713 406,039 2022 321,082 81,708 402,790 2023 317,871 81,697 399,568 2024 317,871 81,697 399,568 2025 317,871 81,697 399,568 2026 317,871 81,697 399,568 Source: Timisoara city hall, summer 2021. The demand projections are based on the current information on contracted services (Table 12) and heat demand (Table 13). The forecast exercise took place prior to the current energy crisis and does not take into consideration potential longer-term impacts. Table 12. Number of clients connected Year Total contracts New contracts Disconnections Annual total 2016 5319 55 194 5180 2017 5180 77 134 5123 2018 5123 35 92 5066 2019 5066 13 43 5036 2020 5036 5 56 4985 2021* 4985 1 15 4971 * Data for first five months of 2021 only. Source: Timisoara city hall. Table 13. Heat delivered, by category of client Total Households Companies Public institutions 2019 2020 2019 2020 2019 2020 2019 2020 30 470,46 481,86 369,09 380,10 78,053 77,052 23,314 24,708 Heat delivered (MWh) 5 0 8 0 No. of consumers 56,634 55,795 525 511 339 339 Source: ANRE reports on DH for 2019 and 2020. B. Strategic market segmentation Based on operational information shared by Colterm16, this section analyzes the DH distribution system from a commercial viewpoint. Thus, an analysis will be carried out by distribution line, identifying line aggregated demand, consumption profile, losses, revenues, operation costs, user dispersion, and quality of the assets supplying heating. The validity of the result of this analysis is limited due to (i) the limited information available for the analysis from the existing DH system and (ii) the need to carry out a detailed modeling of the heating system –which was beyond the scope of this work–. However, the analysis already shows preliminary information and direction to further detail the analysis subsequently. This analysis is relevant to segmenting consumers and allowing the definition and prioritization of specific actions for the different client clusters. These actions may include different technological options for supplying heat, defining different levels of service quality, introducing pricing strategies, optimizing subsidies, and carrying out energy efficiency interventions. It may even drive a strategy to substitute centralized heating with cluster solutions for those clients/neighborhoods where the amount of heat demanded, number of users served or amount of losses would not justify the provision of heat from a central unit. In any case, the outcomes of the analysis will provide transparency and inform the decision- making. In general, for a comprehensive analysis, it is necessary to assess the condition of the complete DH system, which includes a heating system of the consumers and respective substations, followed by the heat distribution and transmission network, as well as the generation plants. The annual heat supply is the main indicator of the supply of the system, and it is the main source of revenue in DH operations. Therefore, the analysis is focused on determining the efficiency and related cost of supply to the consumers, considering the heat losses in the network and substations (PTs). Approach and basic assumptions Due to the restrictions in data collection, the analysis is based on a combination of available system data partially retrieved from the SCADA system for two periods of the year. The approach combines analytical work based on the recorded system data with modeling based on assumptions. Due to this, there are differences in respective values compared to some previous sections of this report. Although there is a significant limitation in data availability, the gathered system data and received information is considered sufficient to make reasonable assumptions about the overall operating regime of the network. Due to the data limitations, it was impossible to carry out a more comprehensive analysis of the operational optimization potential. The findings presented in this section do not present a conclusive final analysis on 16 The analysis is based on the available consumption data all substations (PTs) for the 2022 winter period (21-31 January) and summer period (21-31 July). 31 the basis of which any final optimization measures should be defined or implemented. The approach presented here can be applied in a further detailed analysis, which is beyond the scope of this report. The approach to analyzing the district heating optimization potential is based on three steps. The first step includes a heat load analysis to determine the cluster of substations and their respective annual heat demand. As part of this, heat losses to supply the respective substation are calculated. The subsequent step includes a cost analysis to determine the variable cost of production, considering also different levels of heat losses associated with respective PT. In the last step, it is possible to define the potential for optimization of the DH system, i.e. heat supply costs. The calculations are based on the available consumption data at the substation level (PTs) for the winter period (21-31 January 2022) and summer period (21-31 July 2022). The recorded operational data was provided for different times of the day (7 AM, 3 PM and 11 PM) and contained the following information: • For thermal plants: external temperature, forward and return water temperatures and pressures, hot water flow • For each substation: inlet and outlet water temperature and pressure, 8-hour period flow and daily flow The available data was processed to determine the main characteristics of network segments: • Annual delivered heat to the relevant PT • Length of the pipeline section related to the relevant PT • Annual heat losses per PT • Percentage of the losses of the delivered heat A detailed overview of the input parameters and assumptions made for the analysis is provided in Annex E. In general, the complexity of the system is determined by the number of substations but also the size of each heat consumer, as this has a direct influence on the operation mode. Because the predominant consumer category is households, the heat demand in the system fluctuates more, with higher peak loads and low base loads. The consumer structure and characteristics are relevant factors in the selection of the heat sources and optimization potential of the system. The following figure is a heat map showing the annual heat supplied to substations and total supply losses related to respective substation. The map is based on the longitude and latitude of each substation. 32 Figure 4. Heat map The objective of the analysis is to determine the substations or clusters with high losses, resulting in increased cost of supply. The analysis indicates that several substations have significant losses (above 20%) in delivering the required heat, which offers potential for optimization. The figure below shows only the substation with estimated losses greater than 20 percent. 33 Figure 5. Annual heat supplied to each substation and estimated respective losses in supply The total heat supplied to the consumers supplied by those respective substations equals an estimated 40% of the total heat supplied, with a median loss per substation estimated at 33.6%. This indicates the substations and areas of the network that have significant potential for optimization and helps in prioritizing the areas of the networks for more extensive analysis. The figure below shows the total number of consumers supplied by a respective substation, as well as the related estimate of heat supplied and respective supply losses per substation. 34 Figure 6. Total number of consumers per substation and respective losses As the graph shows, there are several substations that are serving a small number of consumers (i.e. households/apartment buildings, public buildings and offices). Looking at the estimated losses in supply, a more detailed analysis is recommended for those substations, with the objective of optimizing the supply efficiency or exploring decentralized supply options. Figure 7. Selected substations with less than 50 consumers 35 The analysis shown in the figure above indicates that parts of the network supplying the specific substations identified above are heavily underutilized. It is important to note that within the identified substations, only substations PT17a and PT89 can potentially gain new consumers (estimated up to 400). In further analysis, the options for each specific PT for disconnecting or implementing a decentralized supply solution should be investigated. C. Economic optimization of the grid Following on the analysis presented in Part B, we can now identify the optimization potential of the network and respective substations. The main objectives are as follows: • An assessment of substations that are underutilized versus substations that continue to deliver higher quantities of heat for consumers. The proposed approach can support the prioritization of network investments. • Overlapping the sections and substations with the grid map will help identify clusters of high and low heat supply and related cost of supply. This will highlight areas where the network needs upgrading or where alternative supply options could be considered (e.g. areas of low consumption where decentralized supply solutions might be feasible, areas with high demand where network upgrade investments need to be prioritized, and areas with potential for new consumers). Consumers connected to the distribution network are supplied by 117 thermal points (substations) connected to the transmission network. These consumers represent the majority of those connected and about 82 percent of total heat consumption. The transmission network is supplied with heating by the two large plants, CHP Center and CET Sud. CHP Center uses natural gas to produce heat. CET Sud uses coal (lignite) and natural gas to produce heat and electricity. The objective of the analysis is to determine the substations or clusters with high losses, resulting in increased cost of supply. The analysis indicates that several substations have significant losses (above 20%) in delivering the required heat, which offers potential for optimization. The figure below shows the annual cost of supplying the heat to the substations. The right side of the graph shows the total losses calculated for each substation (MWh). 36 Figure 8. The total annual cost to supply the heat to respective substations (€/MWh) Since total cost of supply is determined by considering the heat supplied to each substation and the respective losses in the supply network, the differences in the total cost of supply are dominantly influenced by the total estimated losses. The figure above shows the calculated total cost of supply to each substation and relation of the total cost to the total losses. To get a better understanding of which substations have the highest optimization optional, the unit cost of supply to each substation was calculated. Figure 9. Annual heat supplied per substation and unit cost of supply considering the calculated supply losses 37 It is notable from the figure above that there are several substations (PT Vasil Lupu, PT43a, PT10c, PT 45b) with low annual heat supply and high unit cost of supply due to the high losses in the network. A few substations that have a higher heat supply show notable differences in supply costs. As an example, Substation 83 (PT 83) has a comparable heat supply and number of consumers to substation 45 (PT 45). However, the analysis shows that the cost of supply related to PT 83 is 65% higher compared to PT45. To gain a better understanding of the distribution of substations with high supply costs, further analysis is focused on the substations that have a unit supply cost greater than €100/MWh. The map below shows the estimated cost of supply per substation (€/MWh) only for substations with costs higher than €100/MWh. The size of the circle indicates the total heat supplied to substation. The size and the colors on the map are relative only to the selected substations and not to all substations. Figure 10. Estimated cost of supply per substation for substations with costs higher than €100/MW By looking at the selected substations in the network, it is possible to identify several subgroups of substations that indicate the excessive cost of supply and present high potential areas in terms of total heat demand. As an example, substations PT 58 and PT 53 have a combined heat supply of over 8,000 MWh/year with an average cost of €109 MWh, which is comparable to some of the largest individual substations that show better supply efficiency (substations PT 82 and PT 83 with a supply of 8,665 and 6,939 MWh/year, respectively, and with unit costs of supply between €77 and €87 per MWh). This indicates the areas of the network and substations that should be prioritized when considering optimization and alternative supply options. 38 Another area highlighted in the figure above is the one capturing substations PT22, PT22a, PT8c, PT6. As shown on the map, those are in proximity, with combined annual supply heat of 7,850 MWh/year, and with average losses of 36% and an average cost of supply over €116/MWh. There are several other substations shown on the map that, while not significant in terms of total heat supplied, show high supply costs. In the figure below, the color of the circles shows the annual heat currently supplied to consumers. Figure 11. Number of new consumers that could be supplied by the respective substations and respective cost of supply related to each substation As the figure above shows, several substations currently have high heat supply and low cost of supply but show significant potential to add new consumers (highlighted in the lower right corner). By focusing only on the substations with the highest potential in this regard (in this case, determined as more than 800 maximum potential consumers per substation and less than €100/MWh: PT84, PT 45, PT48c, PT48b, PT40, PT92, PT57, PT32, PT59, PT33), there is a maximal theoretical potential of about 9,300 new consumers that can be supplied by identified substations but are currently using different heat sources (gas). The average supply cost for those respective substations is €84/MWh, with average losses of about 12%. This indicates significant potential for adding new consumers even under current conditions. Since the selected substations already have a high supply, additional optimization of the substations and network upgrades could potentially increase revenues (by adding new consumers) and profitability (by reducing supply costs). The figure below shows the same identified substations on the map. Color shows the supply cost (in €/MWh). The size shows the number of potential new consumers per substation. 39 Figure 12. Selected substations (>800 max. potential consumers per substation and <€100/MWh) Overlarge pipeline circumference is considered a main contributing factor in generating losses. In general, an appropriate measure to address this would be reducing pipeline diameter and optimizing automatic regulation in substations and at the final consumers. A more detailed analysis is recommended when more reliable data is available. Table 14. Summary of potential options for substations €/MWh heat Annual heat Substations supplied supplied (MWh) Options to consider PT38a, PT4b, PT15, PT 106.7 959.94 Disconnecting or Liceu1, PT4a, PT30, (Average) providing more efficient PT34, PT 89, PT31, decentralized solutions PT17a PT Vasile Lupu 220.73 689.00 Alternative individual or PT45b 153.31 972.00 neighborhood solutions. PT10c 163.54 1,269.00 Network upgrades. PT43a 193.43 2,223.00 PT 58 115.96 3,064.00 Alternative individual or PT 53 107.15 5,074.00 neighborhood solutions. Network upgrades. 40 PT59 82.38 2,767.00 Potential for adding new PT48c 85.02 3,067.00 consumers PT32 81.07 3,331.80 PT33 76.11 4,534.20 PT92 92.66 4,804.20 PT40 90.43 4,987.80 PT57 93.87 5,006.00 PT45 73.57 5,119.00 PT48b 80.04 5,564.00 PT84 77.21 6,939.00 Comparison of the alternative supply regimes Data were processed for the two supply periods for which data is available: winter (January 21 to January 31) and summer (July 21 to July 31). In the winter period, there are no substations that are supplied by both plants. In the summer period, several plants (PT62, PT63, PT69, PT81, PT82, PT83, PT84, PT85, PT86, PT88, PT89, PT98, Corbului, Liceul 2, Rusu Șirianu, SDM, Văcărescu, Vasile Lupu Vulturii) receive heat from both Centru and Sud plants. The analysis17 shows that, when the entire system is supplied only by CT Sud, the total losses are 5,809 MWh/year lower than if they are supplied only by CT Centru. D. Potential for energy efficiency Multi-apartment buildings and public buildings Launching an EE program for MABs and public buildings would contribute to optimizing demand for heating services in the city. The proposed program, which involves three scenarios differing in terms of pace of renovation, is described in section III. Depending on the scenario chosen, the energy savings can be achieved either sooner or later, which has implications for the total demand for district heating in DH and the options envisaged for the DH system – generation capacities needed and network investments. According to Romania’s Long Term Renovation Strategy (LTRS), all buildings must be renovated by 2050. The three scenarios plan to renovate all MABs by 2030 (scenario 1), 2040 (scenario 2) and 2050 (scenario 3), respectively, using the same renovation package, which reduces energy consumption by about 50 percent for each household. The financial impact and implementation arrangements for each scenario are detailed in section III. Scenario 3 (the most conservative) may be more realistic as it is based on the current financial and technical capacity; by contrast, scenario 1 (the most ambitious) would create a big burden for the municipal budget (over 21 percent), even though part of the funds could be provided by the central government. Timisoara should consider Scenario 2 (average ambition), which would support the renovation of all MABs by 2040. In this case, the average energy savings from renovation would be about 18,616 MWh/year. The impact on demand for DH will depend on the scenario chosen and whether the city hall will prioritize only buildings connected to DH. 17 Approach to the comparison of alternated supplies is provided in Annex E. 41 Table 15. Annual energy savings (decline in energy demand) after renovation of buildings: three scenarios Useful area of renovated Saved energy/reduced energy Scenario buildings (M m2/year) demand (MWh/year) Scenario 1: renovate all MABs by 2030 0.51 41,887 Scenario 2: renovate all MABs by 2040 0.23 18,616 Scenario 3: renovate all MABs by 2050 0.15 11,968 42 Section III: Technical options for district heating A. Availability of resources Gas The use of natural gas to produce thermal energy in Timisoara implies the connection of the CET Sud and CET Centru sources to the gas transmission network located in the area – the two plants are connected to the distribution network. This will allow Colterm to avoid distribution taxes while obtaining the best possible tariff for the supply of fuel to the heat sources. Timisoara will have relatively good access to gas in coming years from several source, despite the tensions around gas supply in Europe and elsewhere. This is mainly thanks to its proximity to a significant transit pipeline that is under construction (Bulgaria-Romania-Hungary-Austria, BRUA), but also because of the availability of gas in existing deposits in the area, mostly in OMV Petrom’s portfolio. BRUA’s completion may bring imported Azeri gas in 1-2 years (depending on the development of the Bulgarian gas network) and facilitate the access to the market of gas from the Black Sea. There are good prospects for offshore gas: the Midia Gas Development Project (MGD Project) led by the consortium Black Sea Oil and Gas (BSOG, owned by the Carlyle Group and the European Bank for Reconstruction and Development, EBRD) started producing gas from the Black Sea in June 2022. Figure 13. Natural gas transmission and generation Sources: TRANSGAZ, ANRM. Timisoara is close both to the main routes for gas transiting Romania and to gas deposits. Given these developments, in maximum two years the transport capacity could certainly ensure the supply of the natural gas necessary to modernize thermal energy sources and eliminate the use of coal for the production of heat and cogeneration of heat and electricity. Connecting CET Centru to the gas transmission network is a project that has a feasibility study, but the costs are high. If the transition of CET Sud to the status of Colterm’s priority plant is considered, the efficiency of the investment of connecting CET Centru to gas transport must be analyzed. Connecting the CET Center to the TRANSGAZ networks can be done through (i) 4,400 m of pipeline costing 5,218,994.93 lei (approximately €1 million) and (ii) a measuring station at CET Centru costing 950,000 lei (approximately €200,000), based on feasibility studies that Colterm has already prepared for the two projects. 43 Connecting CET Sud to the TRANSGAZ networks can be done through (i) 780 m of pipeline costing 690,000 lei (approx. €170,000) and (ii) a measuring station at CET Sud costing 760,000 lei (approximately €185,000). Coal The use of coal raises issues related to environmental protection and to the cost of emission rights that are associated with this fuel. The available coal in the areas close to Timisoara consists of lignite with low calorific value. Lignite resources in Romania are estimated at 690 million tons, of which 290 million tons [52 million Tons of Oil Equivalent (toe)] can be exploited in deposits for which there is a concession. At an average consumption of 4.5 million toe/year, these resources could last for 28 years, provided that in the next 25 years consumption remains constant and no other deposits are valued. The average calorific value of lignite mined in Romania is 1,800 kcal/kg. However, given the state of current installed capacity, the trends towards complete abandonment of coal in Romania, and the taxation of greenhouse gas emissions, coal is not a medium- or long-term option for the heat supply of Timisoara Municipality. Geothermal Within Romania, several areas have been identified in which the geothermal potential is estimated to allow energy recovery. The potential for resources at the national level is approximately 1.67 million Gcal/year, of which between 155,000 and 200,000 Gcal/year are capitalized. The City of Timisoara, as well as a large part of the Timis county, is underlain by hot aquifers that can support geothermal direct use applications, including district heating. There are perspectives for deep aquifers (>2000 m) with temperature exceeding 100°C, but these seems to be composed of highly saline water with lack of natural recharge (connate water). A shallower aquifer, artesian, with low salinity and relatively active circulation (recharge), seems to be a more viable, and easier to manage, resource. Beneath the Timisoara area, this aquifer is expected to have a base in the depth range of approximately 1000-1500 m, and a temperature that can reach 60-90°C. 44 Figure 14. Geothermal resources in Romania Source: Geological Institute of Romania Over 50 percent of Timis County has a geothermal potential of over 100°C covering all western areas. Currently, the areas with geothermal potential in Timisoara are leased to private companies, but no thermal energy recovery points have been built. The feasibility of integrating these resources into the centralized heat supply system of Timisoara must be validated. The geothermal resource will be considered for small local projects, where the distance from buildings or heat transmission/distribution networks is small, in order to reduce connection costs. Waste to energy The quantity of municipal waste available annually, according to data from the municipality, is about 100,000 tons/year as follows. The data below includes the waste from the city, not the county, though in 2021 the county council decided to revitalize the concept of county-level integrated management of waste (and potentially use the infrastructure developed with EU funds a few years ago). 45 Table 16. Municipal waste availability in Timisoara city only Waste received by the sorting station Daily quantity Municipal waste 400 tons/day Energy recoverable waste 200 tons/day Recyclable waste 90 tons/day Recyclable 15% 13.5 tons/day Energy recovery 76.5 tons/day Waste recoverable annually 100,000 tons/year Lower calorific value 10,800 kJ/kg Source: ISPE study on waste to energy, p. 28 Additional specialized studies are needed to confirm the potential of waste in the area, as well as neutralization technology, and the recently published county plan is a start. The use of waste for the generation of heating depends critically on recent developments in EU policy (e.g., the new “taxonomy”) and on the agreement that could be reached between the municipality of Timisoara and the county council on responsibilities for the management of waste and for the investments needed to realize the energy potential of the waste. Solar heating The exploitation of the country’s solar resource must be optimized between the production of thermal energy (hot water consumption) and the production of electricity. There is an area of several hectares on the current coal storage area on which a solar thermal power plant can be installed to produce hot water for consumption during the summer. The direct radiation that will be considered is 1,231.5 kWh/sqm for the Timisoara Municipality area (see figure). Figure 15. Timisoara Direct Normal Irradiation map Source: World Bank ESMAP 46 Biomass In Timisoara, dry biomass is available in quite small and seasonal quantities – especially in spring and autumn, when the trimming/sanitation of the parks is done. In the Timisoara area, there are also unused land areas that could be used for energy crops. Willow for energy is a species with a short rotation cycle and high regeneration power that can produce (from year two or three) about 30 tons of biomass per year per hectare. The amount of biomass from trimming and other energy crops is currently not known and needs further research. Biofuels Biofuels can come from waste neutralization channels, such as gasification, that do not involve incineration. As in the case of waste-to-energy, it is necessary to know precisely the amount of waste generated by the community, the chosen neutralization technology, and the flow of fuel that is generated to be transformed into thermal energy. Additional challenges include the contractual agreements between the municipality and the county council for the use of the waste. Hydrogen The use of hydrogen is very expensive, especially if it is obtained exclusively from renewable sources. It is difficult to estimate when it will become economically feasible to use hydrogen to produce thermal energy for the heating of Timisoara Municipality. Electricity-based solutions The production of heat from electricity is done using heat pumps. They can be combined with geothermal steam or can use heat from the ground or groundwater. The heat-pump solution can be applied either at the level of a centralized or decentralized source in each thermal point / thermal power plant. For increased efficiency, heat pumps must be supplied most of the time with green electricity produced by a solar photovoltaic park. For reasons of space, the sizing of the heat pumps must be checked to ensure it covers the need for hot water or part of the thermal energy requirement for heating. Heat pumps must be combined with hot water storage to maximize the positive effect of photovoltaic energy. Heat recovery from industrial processes No industrial platforms have yet been identified that are capable of producing useful thermal energy for heat supply to consumers in Timisoara. At the same time, the solution (for use in central heating) of residual heat from industrial platforms has not been implemented in Romania for the last 30 years, due to difficulties related to the measurement and pricing of the delivered heat. 47 B. Technical options Heat generation Technical alternatives have been analyzed at three levels of service provision, with the aim of outlining tested, efficient and sustainable solutions for providing heating to households in Timisoara: (i) district heating (currently provided by the South and Central plants); (ii) neighborhood (six small neighborhood plants); and (iii) domestic (focusing on solutions for buildings or apartments). The proposed solutions were assessed separately and not combined or consolidated at the level of the overall heating system. A simplified economic analysis was carried out for each proposed option by estimating the levelized cost of heat (LCoH). CAPEX, OPEX and the cost of externalities (i.e. carbon emissions) of the different technological alternatives were estimated. For CAPEX and OPEX values, local and international benchmarks were used since no operational information is available18. A sensitivity analysis to the price of gas and/or electricity was carried out. Further analysis is needed to establish the feasibility of each option in Timisoara. Green hydrogen has not been analyzed under this section. It may become a viable solution in the future, but its cost and availability are currently uncertain and the technology and market still immature, in addition to logistic technological issues. This technology may be kept on the radar to become a solution in the mid-to-long term but is not recommended to be considered in the mix of heating technologies in the next five to ten years. District heating-level solutions Based on the size of existing installations and the back-up capacity required to ensure service in the case of maintenance and the decrease in the number of connected clients, it is estimated that the capacity needed to cover DH needs for the city would be 20 MWt in Central and South plants each (40 MWt, excluding neighborhood plants). The following technological options could address heating needs at maximum efficiency, while also providing flexibility and reducing carbon emissions. Option 1: Biomass/waste combined heat and power (CHP) plant with steam turbine generator – in place of existing coal/gas plant in South and Central DH plants The new plant would be capable of burning either biomass sourced around Timisoara or waste collected within the city. Based on a biomass heat content of 10,000 kJ/kg and 8,000 hours of operation per year, the total amount of biomass required would be 11 tons/h or 90,000 tons/year. Consequently, about 100,000 tons/year of waste would need to be made available through waste collection in the city and its vicinity. Based on the estimated availability of waste of 100,000 tons/year (see section above), it would not be possible to switch both DH plants to biomass/waste. Given its location, the South plant would be prioritized as a waste facility requires space like the actual coal operation. Its distance from the city center is an advantage in terms of waste management and its potential consequences on the neighborhood 18 Sources: i) Technology Data - Energy Plants for Electricity and District heating generation First published August 2016 by the Danish Energy Agency and Energinet, E-mail: teknologikatalog@ens.dk, Internet: http://www.ens.dk/teknologikatalog Production: Danish Energy Agency and Energine; ii) METIS Studies Study S9 Cost-efficient district heating development - METIS Studies October 2018; iii) Chapter 2, STATIONARY COMBUSTION - 2006 IPCC Guidelines for National Greenhouse Gas Inventories; iv) GHG and NOx emissions from gas fueled engines Mapping, verification, reduction technologies - SINTEF Ocean AS Maritim 2017-06-13; v) Leaflet Wartsila. 48 (truck traffic, smells, flue gas,…). Alternatively, the Municipality of Timisoara could decide to develop its own sources of sustainably managed biomass – but because this would require significant investments and technical resources to operate, it is not recommended. Detailed description The new plant would be equipped with a steam turbine generator producing electricity; exhaust steam would feed the DH system through steam/water heat exchangers. The steam turbine can be installed either in a backpressure configuration or feed the DH system through a dedicated steam extraction19 (in the latter case, a condenser is required with cooling water). Although both technical options are valid, condensing turbine operation and electricity production could be optimized during lower heat demand period, i.e., during the summer. For a DH application, the return water temperature allows for condensation of the flue gases to recover this energy and increase overall plant efficiency. The type of biomass and its quality as available in the vicinity of the plant may vary according to their source (from forest to construction sites) and must be considered when designing the boiler and fuel feeding and combustion systems. Some types of biomass could be corrosive for internal boiler parts, which could limit the maximum operating temperature. A flue-gas cleaning system is required to reduce NOx, SO2 or other metal content present in the feedstock before the gases reach the atmosphere. The temperature range as foreseen to supply heat to the system would be between 50-100°C as it is connected (within Timisoara’s DH system) directly to the transport network from the South DH plant. For an assumed 20 MWt output to the DH system, the analysis foresees a boiler feeding a steam turbine with about 32 t/h of superheated steam (480C, 60 bar). The turbine will deliver about 5 MW of electricity and feed the DH at a pressure of 1.2 bar with a temperature range of 50-100°C. Detailed costs Approximately €25 million in capital expenditure (capex) would be required. This estimate includes the boiler (with biomass storage and feeding systems), the steam turbine, the water purification system, and the flue-gas cleaning system. The plant buildings necessary to accommodate personnel, offices and maintenance shop would require an extra 10 percent in extra investment. The estimate is based on the following assumptions: • The capex for a small-to-medium-size biomass power plant is about €5 million/MWe with a power output of <10MWe. • Operational expenditure (opex) variable: €5/MWhe (excluding fuel costs); biomass opex: €25– 30/ton or €2.7 million/year + €200,000/year (for waste, further analysis is required based on type) • CO2: 0.360 kg/kWh (biomass), which could be confirmed through a waste study 19 Extraction system allows a better optimization of power generation. 49 • Fixed opex: €150,000/year • Output = 20 MWth * 8000 hours = 160,000 MWhth Pros and cons of the proposed option Pros Cons - Decarbonized approach to CHP - Area required is more important as biomass - Independent of fossil fuel price fluctuations fuel requires storage space, typically suited - No CO2 penalties for 2 days of full load operation Scalability - Biomass availability would need to be confirmed in terms of both quantity and quality - Requires flue gas cleaning system, depending in fuel quality - Operation and maintenance constraints requiring manpower and specific equipment Biomass/waste to heat DH in Malmö, Sweden The district heating system in Malmö runs on a combination of biomass and fossil fuels. Approximately 60 percent of the city’s heat energy is produced by the incinerator operating in the city via waste-to- heat energy plant; 16 percent of the district heating is provided by excess heat released from major industrial activities in the city. As a result, approximately 65 percent of the DH system comes from renewables, contributing to lowering primary energy consumption and CO2 emissions. The new natural gas fired CHP uses state of the art technology to produce 440 MW of electricity and 250 MW of heat. The incinerator relies on an optimized waste management system, with 90 % of the municipal waste in Malmö and surrounding areas either recycled into materials or burned in the incinerator plant via CHP to create heat and electricity. All of the municipalities in southern Sweden send their waste to Malmö, where it is processed and converted to heat that is fed into the district heating network. Finally, the DH system utilizes surplus heat from industry, such as the company Evonik. Their process creates gas as a waste product which is used to produce 25 MW of heat and 9 MW of electricity. Source: Draft report “Promoting Circular Economy approach for district heating sector in Uzbekistan” by Nah- yoon Shin (World Bank) Next steps For both biomass and waste options, the next step will be to confirm the availability of either suitable biomass or waste to be burned in the plant. 50 Option 2: Gas engines Several gas-engine-based CHPs delivering both heat and electricity could replace the current DH coal- and gas-fired plants in both south and central locations. Although these engines are fueled with natural gas, they could be retrofitted to burn biogas and/or hydrogen in the near future, which is an opportunity to decarbonize their operation in the mid-to-long term. This option is preferred to that of a single gas turbine with a heat recovery system feeding the DH network with hot water, as the gas turbine does not have redundancy and is unable to run at low load without sacrificing efficiency. By contrast, gas engines can flexibly respond to demand fluctuations. In the current environment of soaring gas prices, this option is not financially viable. However, given its many technical advantages, and the uncertainty about the future evolution of gas prices in a very fluid geopolitical context, the option has been analyzed below. Description Based on a required 20 MWt of heat, the plant would consist of 3 units of about 7 to 8 MWe demonstrating an electrical efficiency of between 45 and 48 percent. Those units would feed 6 Gcal of heat each into the DH –system, with the advantage of flexibility in case heat demand declines at certain times of the year. The engines can be operated with different fuels and hence provide flexibility in terms of fuel sourcing and costs. The fact that the plant would rely on several engines is beneficial to its flexibility, as one or several engines can indeed be turned off during periods of low heat demand while the remaining engines can operate at full load and maximum efficiency. The engines would come with a CHP-ready configuration and sound enclosures. The plant would generate a total of 24 MWe of electricity and 20 MWt of heat at maximum capacity. Costs • Capex = €1–1.2 million/MWe, • Variable opex = €5.4/MWhe; gas costs, the main driver of operating costs, estimated at: €4.3c/kWh20 • Fixed opex = €10,000/MW/year based on natural gas operation • Opex with biogas operation: would increase costs by 30 to 40 percent • Natural gas consumption per year = 350,000 MWh/year • Heat generated = 160,000 MWht 20 https://ec.europa.eu/eurostat/databrowser/view/nrg_pc_203/default/table?lang=en. 51 • The CO2 emissions are estimated at 0.421 kg/kWhe for natural gas operation. Depending on environmental guidelines, a depollution system may be required to further reduce NOx emissions. Pros and cons of the proposed option Pros Cons - High efficiency: multi-engine configuration - Engines require regular maintenance according provides security of supply and flexibility when to the OEM schedule: major overhauls every 4-5 heat demand fluctuates years - Proven technology, highly reliable and efficient - Flue gas treatment could be required depending - Fuel flexibility on local regulations regarding equipment - Potentially 100 percent decarbonized with the - CO2 penalty applicable if operated with fossil use of biogas, biofuels, or hydrogen; the fuel engines’ flexibility in terms of fuel use can broaden the range of sources while decreasing supply risks and price - Such plants have a relatively small footprint, which allows the remaining space to be utilized for solar PV etc. Next steps The availability of space and compatibility of noise requirements should be assessed to check suitability of such technology applied to DH plants. Neighborhood-level solutions Option 1: CHP based on gas engines (as is) As some decentralized heat production plants are already equipped with CHP based on gas engines (Buzias, Freidorf and Dunarea), this approach would accelerate momentum given the good fit of such technology towards meeting DH requirements. Beyond scalability and flexibility, this solution could be completely decarbonized through the use of biofuels or even hydrogen in the near future. Description Those engines ’power output is in the range of 0.5 MWe, providing to the DH system about 0.6 MWth of heat. Several engines could provide the necessary heat all year long while demonstrating the necessary flexibility during periods of lower heat demand. Existing heat production could be upgraded with additional natural-gas engines while the existing boilers could be kept in order to meet peak demand during the winter. Costs • Capex = €1-1.2 million/MWe 52 • Opex variable = €5.4/MWh and gas costs = €4.3c/kWh • Fixed opex = €10,000/MW/year based on natural gas operation, while biogas operation would increase the Opex by 30 to 40 percent. • Natural gas consumption per year = 15,000 MWh/year • Heat generated = 79,600 MWht/year/plant based on 8,000 hours of operation per year • The CO2 emissions are 0.5049 kg/kWh for natural gas operation. To meet environmental criteria, a depollution system may be required to further reduce NOx emissions. Pros and cons of the proposed option Pros Cons - High efficiency: multi-engine configuration - Engines require regular maintenance according would provide security of supply and flexibility to the OEM schedule as a function of demand - Flue gas treatment may be required depending - Proven, highly reliable technology on local regulation - Fuel flexibility - Fuel gas treatment is sometimes required if the - Potentially 100% decarbonized with the use of fuel contains substances that must be removed biogas, biofuels, or hydrogen; the engines’ to preserve reliability flexibility in terms of fuel use can broaden the range of sources while decreasing supply risks and price - Already installed and in operation Next steps Existing infrastructure in neighborhood plants should be assessed to determine potential needs to upgrade gas engines and improve their efficiency. Option 2: Heat pumps and solar PV system The presence of a heat source, in the form of wastewater or other underground heat source (such as geothermal), could allow heat pumps to be deployed and completely decarbonize heat production while improving the efficiency of the process. Existing CHPs based on gas engines would be kept as-is and would not be replaced. The neighborhood plants equipped with hot water boilers (UMT, Dragalina and Polona) would initially be upgraded with heat pumps of similar size, while the existing boiler units could be used as standby units to cover peak demand during winter. For those plants the analysis distinguishes between large, medium and small heat pumps, in reference of their respective power output (8, 6 and 1 MWt). Description 53 The primary environmental impact of heat pumps stems from the source of their driving systems and therefore depends on the fuel type and production method. For instance, heat pumps could benefit from geothermal sources to increase output temperature and participate in the regulation of the heat dispatched to the system according to seasonal demand. In a decentralized scenario, heat pumps with a power of between 1 and 3 MWt are in line with existing installed units. An approach that could further strengthen the use of heat pumps would consist in the installation of solar PV. The previous report mentioned that 30 ha located at about 11km from the South plant could be available and do not require massive investment in terms of electrical connection. The installation of 27 megawatts peak (MWp), considering potential site limitation21 would produce about 34.5 GWh of electricity per year according to a preliminary simulation based on irradiation data. This energy could feed the heat pumps – which, in combination with hot water storage (which is more economical than battery storage), could produce heat during the day and deliver it at times of peak demand. At a cost of 0.45 million €/MWp, the system would represent an investment of €12 million and would facilitate the decarbonization of the heating district system of Timisoara. Costs (Heat pump only) • Capex: €1.0 to 1.4 million/MWt (decreasing with installed power)- does not include PV and heat storage • Variable opex : €2.7/MWh • Fixed opex: €2,000/MWt/year • Heat produced: UMT: 12,000 MWht/year, Dragalina: 16,000 MWht/year, and Polona: 2,000 MWht/year • CO2 emissions for existing gas boilers: 0.701 kg CO2/MWh (Romania electricity emissions factor) Pros and cons of the proposed option Pros Cons - High efficiency - Heat source requirements - Decarbonized solution - Would require access to a suitable electrical grid - Operational flexibility combined with heat connection given the power required storage Next steps Analysis should be carried out to confirm the availability of suitable heat sources (such as underground surveys and determination of sewage water availability/accessibility). If availability is confirmed, heat storage should be assessed as an opportunity to maximize the use of PV power at maximum production efficiency and dispatch heat when required. 21 A coefficient of 0.9 was applied to the available area to determine potential power installed. 54 Option 3: Geothermal plant Detailed description This description is based on a public news report regarding a geothermal district heating project22 in Timisoara funded by a grant from the European Economic Area (EEA) in mid-2014 (under RONDINE project). Based on data from the project, the analysis assumes that one production well would be able to supply about 40,000 MWht to the DH system each year or about 10 percent of its total annual demand. This is not considering the temperature of 60°C at the wellhead that would be too limited to supply the system efficiently during wintertime and considering system’s losses. The geothermal resource could be used to pre-heat returning water from the DH system and decrease the energy required by other heat production resources to bring the water to its nominal setpoint as required by the DH system to ensure the quality of the service. Another solution would consist in the geothermal well feeding a heat pump system to boost the temperature output to the required values by the DH system and according to seasonality of demand. The heat pump could modulate the temperature of the DH water while reducing its load factor during summertime to the benefit of the combined LCOE. Though a detailed engineering study is required to assess and confirm whether the geothermal resource is adequate to feed a heat pump of such size, a few MWht, and the combined energy output, the benefits of this approach in terms of decarbonization are important. It is reasonable to assume that the main impact of such combined approach will result in a lower load factor of the heat pump and hence in a reduction of the operation costs as the electricity use decreases significantly. Costs Approximately €5 million in capital expenditure (capex) is required for each doublet consisting of a production well and a reinjection well. Subsurface equipment like pumps, surface equipment's as the reinjection pump, valve systems, heat exchanger and a building to host those facilities would account for an extra €0,5 million. Prior to this a detailed geological survey study must be performed and could cost up to €1 million per doublets. Potential cost savings due to the benefits of scale are not included. The estimate is based on the following assumptions: • The capex for a doublet consists of the costs for the study (€1 million), the drilling costs amounting to €5 million per doublet as a standard reference. Facility to host surface equipment, valves system, heat exchanger and required submersed and reinjection pumps is about €0,5 million. 22 The project was assigned to the Icelandic consultant Mannvit in association with the local company Sifee Terra Heat, to be executed in collaboration with the Municipality and Colterm. It was expected to contribute an annual heat capacity of approximately 40 GWh and start commercial operation in 2016. Documents mention a well drilled in a site within the Timisoara urban area (central-south portion), inside a 20 km2 concession area, and planned to deliver geothermal heat to CET South. No further news was reported on the effective conclusion of the project (https://www.mannvit.hu/hirek/romanian-geothermal-project-grant-award; https://www.thinkgeoenergy.com/icelandic-firms-receive-funding-for-heating-projects-in-romania; https://www.thinkgeoenergy.com/iceland-sees-potential-for-geothermal-district-heating-in-romania). 55 • Operational expenditure (opex) variable is limited to the electricity costs of running both pumps, i.e, about 80,000 euros per year; • CO2: 2.13 kg/MWht based on an intensity factor of 250 g CO2/kWhe; • Output = 40,000 MWht per doublet as assumed for the present case based on data available Pros and cons of the proposed option Pros Cons - Decarbonized option - Resource/location needs to be confirmed- this - Base load will impact costs - Independent of fossil fuel price fluctuations - High upfront development and investment - No CO2 penalties costs - Low operational costs - Potential geological risk - Can be combined with other sources and heat - Scalability potential to be confirmed storage - Long duration for the development and - Limited area requirements construction of the plant - A relatively low output temperature achieved (60C), which could limit potential. To be confirmed by a detailed study Next steps The viability of geothermal resources should be confirmed through resource studies, as well as the location and potential connection to the DH network. Option 4: Solar Thermal Description: Provided a sufficient area is available in the vicinity of Timisoara with easy access to the DH network, solar thermal heating remains an interesting and completely decarbonized option. Given its low maintenance and operation costs, this solution can provide heat all year long at a competitive LCOE. To benefit from this, scaling is important. A surface of 13,000 m2 would produce about 6000 MWht per year at an LCOE of €37.6/MWht. Nevertheless, it must be understood that production of solar heating takes place when the heat demand is lowest – both on a daily and seasonal basis. Without storage, the system will cover typically about 5 to 10% of yearly demand; the presence of heat storage will raise this share to about 20-25%. Hence, such a system can only be used in a combined approach. 56 Given the system will produce most energy during the day, the installation of heat storage could help to feed the system during peak hours. A similar system with heat storage would see its LCOE increase up to €42.8/MWht. • Capex = €395 – €452 (incl. storage)/MWt • Opex variable = 3.5 kWhe/MWht • Opex fix = €1/MWht-year • Heat generated = 6,000 MWht for a 13,000 m2 plant taken as an example Pros and cons of the proposed option Pros Cons - Completely decarbonized - Production function of season and weather - Proven technology, simple, robust and conditions highly reliable - Cannot be used as a standalone system, must be - Low maintenance costs combined with other system - Long technical lifetime - High occupational area - Heat production independent of fossil fuel - High initial investment costs but leading to and electricity prices competitive heat supply prices - Low environmental impact Next steps An assessment should be carried out to identify an adequate area (i.e. with good irradiation) and at reasonable distance to the existing network to minimize investment cost in transport and system losses. Individual-level solutions: multi-apartment buildings Before evaluating possible solutions for MABs, an analysis should be carried out at the building level to assess the precise location and cause of the losses, access to gas network, and availability of space for installation of heating system. Next steps consist in examining, on a case-by-case basis, the space available, location and proximity/connection to gas networks, to determine the most suitable solution. Possible solutions could include the following options. Option 1: Gas boilers Gas boilers are widely used and have proved their reliability and high efficiency, especially the condensing ones. This is probably the most obvious option for households, provided there is access to natural gas, as this is the most affordable solution compared to the other technical solutions. Crucially, the exhaust stack must be suited for the operation of condensing boilers as the flue gas temperature is much lower and there are risks of condensation. This upgrade is expensive but mandatory. The typical heat output for such an application is in the range of 15–30 kWt. 57 Costs Investment costs are typically around €150/kWt, excluding specific installation requirements and provided connection to natural gas exists. Pros and cons of the proposed option Pros Cons - Reliability - Operation costs linked directly to natural gas - High efficiency prices - Affordability - Difficult decarbonization Option 2: Electric heaters We must distinguish between a hot-water electric boiler and a heating system for a household based on an electric device. The first one is a simple and affordable approach to producing hot water consisting of an electric resistor that will heat a water reserve of 50–150 liters. Typically, the only downside is the cost of maintenance and of electricity to operate it. For an electric device designed to maintain a comfortable ambient temperature in an apartment, there are several technical options. Provided the buildings are well-insulated, an electric accumulator is a solution consisting of an electric resistance that will store heat within an accumulator made of refractory material. The heat will then be released in the rooms when required to keep the temperature to its set point. Although more expensive than simpler solution, it offers the opportunity to benefit from off-peak electricity tariffs or from the production of a PV installation. Costs The maintenance costs of such systems are negligible. The capex for that type of heating system is about €400/kWt. Pros and cons of the proposed option Pros Cons - Reliable - Operation costs linked directly to electricity - Decarbonized prices - Easily installed - Off-peak electricity tariff requirements - Compact - Higher investment costs compared to standard - Can be coupled to a domestic PV installation system - Performs best within a well-insulated building 58 Option 3: Heat pumps Within an apartment building, access to heat sources may be problematic or even impossible. The heat pumps best suited for this kind of application are those that source heat from the ambient air. Costs Besides the installation costs, the equipment itself is expensive and is within approximately €300-500 /kWt (depending on their size). This estimate excludes installation costs, which can vary depending on a house’s configuration. Opex costs are based on electricity prices. Pros and cons of the proposed option Pros Cons - Decarbonized - High investment costs - High efficiency - Installation may be complex depending on the - Heating and cooling possible configuration of the house/apartment - Operational costs linked directly to electricity prices Option 4: Wood-pellet boilers for individual houses or public buildings In modern wood-pellet-based heating systems, the pellet fuel is transported from storage to the combustion chamber, where it is ignited and combusted. The heat transfer and supply sufficient air for optimal combustion is improved by a fan. The flue gas from the combustion process passes through a heat exchanger and transfers its energy to the water. The complete combustion of the fuel in an optimized, two-stage combustion design results in very low emissions of particulate matter because of the absence of unburned hydrocarbons in the flue gas. The particulate matter (dust) from the optimized system is primarily inorganic, while emissions from lower- technology stoves and boilers are mostly unburned organics. Pellet-fired boilers are typically used in single-family houses (30 kW) and small public buildings with boiler capacity up to 150 kW. These systems are convenient and fully automatic in operation (automatic ignition and shutdown, fuel supply, ash removal, and heat-exchanger cleaning). They can also be combined with solar thermal systems through the use of an accumulator (storage) tank. Costs The investment costs of pellet-fired boilers are substantially higher than those of traditional wood-log- fired boilers, which can be a barrier to wider use. Typical unit costs are €100–150/kWt. 59 Pros and cons of the proposed option Pros Cons - CO2 neutral - High investment costs - Low fuel costs - Availability of wood pellets - High fuel efficiency (80-90 percent) - Operational costs linked directly to price of - Fully automated pellets - Very high operation and fire safety standards Option 5: For individual households: Heat pump air-water and solar PV A combination of a heat pump heating system with solar panels can ensure that heating and hot water needs are met while also being environmentally friendly. It is entirely possible that solar panels will be able to produce all the electricity required to run a heat pump depending on the size of the solar installation. That is, households typically generate more electricity than they use over the course of a year, although this would not be applicable to night-time usage. Solar PV systems convert energy from the sun into electricity, which can be used to help power a heat pump, thereby reducing the need for electricity from the grid. Costs The unit cost for a heat pump is €500/kWt (not counting installation costs, which can vary depending on a house’s configuration). Solar panels investments are estimated at €2,000/kWp. Pros and cons of the proposed option Pros Cons - Decarbonized solution - High upfront costs - High efficiency - Installation could be challenging depending on - Heating and cooling possible house configuration Levelized cost analysis Based on the estimated costs described above, a levelized cost analysis was carried out for District Heating, Neighborhood and individual/domestic solutions, with a sensitivity analysis based on a variation in electricity and gas prices (Table 17, 18 and 19). It must be clarified that the LCOE presented below is corrected to include DH system losses, estimated at 36 percent. This allows comparison between the 60 different technologies while leveling the playing field for the solution aiming at delivering heat into the network system This LCOE analysis does not quantify a key benefit for the municipality would derive from adopting renewable-energy based solutions: strengthening of its energy security. Table 17. District level solutions23: Corrected levelized costs of energy/heating with sensitivity analysis Source: Internal assessment of the World Bank based on available information provided by Colterm and Eurostat24 Table 18. Heat pumps* (neighborhood solutions): Corrected levelized costs of energy/heating with sensitivity analysis 23 8,000 hours of operation/year were estimate for district and neighborhood solutions. 24 https://ec.europa.eu/eurostat/statistics- explained/index.php?title=Electricity_price_statistics#Electricity_prices_for_household_consumers 61 *Note : Large- 8MWt, Medium: 6MWt and Small: 1 MWt Source: Internal assessment of the World Bank based on available information provided by Colterm and Eurostat Table 19. Neighborhood and individual solutions: Corrected levelized costs of energy/heating with sensitivity analysis (EUR/MWh) Level Technology LCOE Min LCOE Max Neighborhood Geothermal 39 44 Geothermal & Heat pump 64 133 Heat pump 74 416 Solar thermal (13,000 m2) excl. - 38 storage Solar thermal (13,000 m2) incl. - 43 storage Individual Solar heat 20 173 Wood pellet 45 95 Heat pump 108 187 Gas boilers condensing 171 184 Source: Internal assessment of the World Bank based on available information provided by Colterm and Eurostat, 62 Eurostat LCOE min/max within EU27 countries The table above looks at the LCOE for standalone geothermal project and with heat pumps corrected for system losses for both options for the lowest and maximum price of electricity considered: − Geothermal only, for reference with 40,000 MWht potential per year − Geothermal & large heat pump based on 2,000 operating hours of the heat pump with a combined potential of 56,000 MWht per year It is worth noting that a heat pump solution only could present an LCOE of up to €400/MWht given the assumptions made on the electricity price in the future and its operation hours of more than 8000 hours per year. The solution proposed here could see the maximum LCOE divided by a factor of 3 despite the impact of the investment required to drill the production and reinjection wells as both systems would complement themselves. An optimum design would result from a detailed engineering study. Energy efficiency investments in MABs The EE package envisaged for buildings is in line with the Long-Term Renovation Strategy and includes the following: • Increasing the thermal insulation of the building envelope25: • Walls: ~15 cm of typical thermal-insulation R’=3,09 m2K/W; U’=0,32 W/m2K • Terrace/roof: ~25 cm of thermal-insulation R’=6,20 m2K/W; U’=0,16 W/m2K • Basement: ~12 cm of thermal-insulation R’=3,450 m2K/W; U’=0,29 W/m2K • Windows: replacing the windows with higher energy performance: R’=0,91 m2K/W; U’=1,1 W/m2K • Upgrading the heating substation and system of the building, including installation of balancing valves and installation of TRVs (thermostatic radiator valves) with manual and automatic flow control. • Installing mechanical ventilation with heat recovering equipment and air conditioning equipment (this measure applies to public buildings only). 25 Key parameters are based on R’ (corrected thermal resistance) and U’ (corrected thermal transmittance) values. 63 Section IV: Assessment of sustainable district heating alternatives A. Recommended heating solutions A comparison of LCOH in each substation (PT) under the existing DH system and potential technological alternatives has been carried out. The figures below show LCOE for each technical solution, according to the three levels of analysis: district, neighborhood or individual/domestic. The purpose is not to assess the installed power of each potential technical solution for each delivery point, but rather to provide a decision-making tool aiming at assessing, for each PT, the economics of its present supply costs and its economic performance against other technical solutions. From there, the question about whether a PT is economically served with heat with the current system can be challenged by comparing its current supply costs to other technologies. On a case-by-case basis, each PT can be assessed on an individual basis and within its local environment, taking into consideration other PT in its vicinity or district heating facility. A substation experiencing heavy losses could benefit from being disconnected from the network while a domestic or neighborhood technical solution is proposed to households with the objective of reducing costs and improving the quality of service. This approach can be applied to each level defined within the district heating network: district, neighborhood and domestic. 64 Figure 16. Comparison of Levelized Costs of Energy by PTs and District level solutions Source: Internal assessment of the World Bank based on available information provided by Colterm and sector benchmarking 65 Figure 17. Comparison of levelized costs of energy by PTs and neighborhood-level solutions Source: Internal assessment of the World Bank based on available information provided by Colterm and sector benchmarking 66 Figure 18. Comparison of levelized costs of energy by PTs and geothermal energy solutions Source: Internal assessment of the World Bank based on available information provided by Colterm and sector benchmarking At the individual/domestic level, there are delivery points that could benefit from a switch to domestic natural gas boilers and domestic heat pumps while a domestic solar thermal approach could lead to the most economical solution if all conditions are met (orientation, irradiation, installation costs depending on building characteristics). Losses are not considered in the domestic LCOE calculation as domestic solutions aim to supply heat to individual households exempt of network losses. 67 Figure 19. Comparison of Levelized Costs of Energy by PTs and Individual level solutions Source: Internal assessment of the World Bank based on available information provided by Colterm and sector benchmarking B. Potential corporate alternatives for Colterm In the documentation prepared by Timisoara municipality for the Competition Council to extend the contract with Colterm, four legal options for organizing the heating service were analyzed and option 3 (current situation) was found preferable. The options vary from direct management of the municipality (the so-called “public service of local interest”) to a fully commercialized entity with a concession contract (possibly a private concessionaire). All options are legally valid, from the point of view of the current legislation, though the EU state aid rules and the need for clear financial and operational accountability tend to narrow down the effective options towards more commercialized solutions. Option 3 (currently selected) is semi-commercial. The main difference compared to the full commercialization lies in the fact that the municipality is still allowed to provide compensations and subsidies for the provision of heating - which is currently allowed to do by 2023, according to MDPWA Order 1121/2014. But as explained below in the Governance section, the current situation leads to lack of clarity with regard to financial flows, and full commercialization would be preferable, as well as more in line with EU rules of state aid, while clearly separating the public service obligation. This corresponds largely to Option 4 plus a separate channel for 68 PSO compensations. The municipality would not necessarily need to concession the service to a private operator, though the relationship between the local council and Colterm would be the same regardless of whether the company is private or remains 100% in local ownership, at arm’s length. In addition to effective commercialization, Colterm would benefit from the externalization of non-core activities, such as some responsibilities concerning waste management and water pumping. Apart from DH, Colterm performs a range of other local public services, although they represent a relatively small part of the total operations of the company. Such activities are not directly related to DH and have remained a part of Colterm’s business as legacies from previous splits of local services among local companies. Retaining such business unnecessarily complicates the administration of DH by creating confusion in Colterm’s accounts, revenues, and costs of operation. In future it may also cause additional complications for the provision of other local services in case of Colterm’s insolvency or during its envisaged restructuring, whereas these activities properly belong to other municipal companies and services. Thus, water pumping is a core activity for water and sewage management, which properly belongs to Aquatim; and Aquatim, not Colterm, should bear the ultimate responsibility for all activities related to water and sewage provision. C. Environmental impact screening and scoping The municipality will select those options to be part of the strategy and a preliminary environmental impact screening and scoping will be carried out, identifying potential risks and proposing the scope for a full environmental and social impact assessment, in compliance with relevant EU and national environmental law. Due to the close link between the technological solution and the environmental and social impact, this report cannot provide detailed Environmental Impact screening, which should be carried out once the technologies are to be selected, and a deeper Environmental and Social impact Assessment will be carried out at project level. Relevant elements of the Environmental and Social Impact Assessment should be the estimated reduction of GHG emissions, air pollution, noise pollution, impact to potential underground water, management of hazardous materials and liquids, and impact to flora and fauna. Figure 20 below compares CO2 emissions by technology. Emissions from biomass are considered neutral. Geothermal solution would result in the lowest emissions for the system. 69 Figure 20. Comparison of CO2 emissions by technological solution Source: Internal assessment of the World Bank based on available information provided by Colterm and sector benchmarking D. Financial analysis Financial analyses were carried out to assess the viability of the district level options and EE renovation program, and their impact on the performance of Colterm. As a first step, the financial analysis in a Business-As-Usual (BAU) scenario has confirmed the deteriorating trend in Colterm’s performance, in the absence of any rehabilitation or modernization investments. Annex F includes the detailed financial analysis summarized under this section. Financial analysis in the “Business-As-Usual” (BAU) Scenario A financial model of Colterm has been built to assess the robustness of the municipality’s DH sector in the future. The financial model depicts a 10-year projection of the SOE financials considering multiple inputs (described in the figure below) to give a view on the “Business as Usual” (BAU) scenario. In this scenario, it is considered that no further investments are made to build new greener and cost-effective plants, no 70 investments in upgrading the T&D system, and no investment in the improvement of energy efficiency (EE) at the level of the multi-apartment buildings (MABs) and the public buildings (PBs). The projection of the financials in the BAU scenario shows that the ongoing situation faced by the SOE (declared bankrupt) is expected to worsen due to the increase in fuel and carbon prices (see Figures X and Y below). The DH sector needs extensive investments in the production (plants) and T&D segments as well as an improvement in the technical and commercial efficiency. A clear strategy to tackle the rise of fuel prices needs to be assessed and implemented. Figure 21. Income statement ratios, 2018-31 Source: Internal assessment of the World Bank based on available information provided by Colterm and sector benchmarking Figure 22. Equity to LT liability ratio, 2018-31 Source: Internal assessment of the World Bank based on available information provided by Colterm and sector benchmarking Financial analysis for the technological shift to sustainable heating Financial analyses of the two District Level technological options, together with investments in EE renovation program (scenario 2) and their impact on the financial performance of Colterm have been carried out. Detailed analysis is included in Annex F. 71 Option 1: Biomass/waste CHP Project financial analysis A high-level financial analysis of the project has been run over 20 years. The Project Internal Rate of Return is calculated on the basis of a simplified cashflow statement built of the project. Energy sold considered is taking into account a 36.3 percent loss through the T&D DH network. The project can generate up to 40,000 kWh of electricity per year. The project is sustainable and shows good profitability ratios: Project Internal Return Rate is of 11.4% for the bond bullet repayment option and 10.5 percent in case of an IBRD loan repaid annually. The Project’s Levelized Cost of Energy (LCOE) comes at €33.4 /MWh (equivalent to 3.34 € cents per kWh). The project will show greater IRR and lower LCOE if the electricity produced is taken into account. Average yearly heat to be distributed (after technical losses) amounts to 102,000 MWh which represents around 25% of total yearly heat distributed (after technical losses) to end-users ’consumers. Impact on Colterm’s financials The integration of this project into the DH system to offset production from existing plants would have a great impact on the DH financials. This is shown through the EBITDA and net profit/loss to Colterm depicted by the figures below. Average annual EBITDA over the 10-year period is (+3) million Lei. Nevertheless, the company still makes a continuous annual net loss but at lower levels: the annual average annual loss would decrease from 42 million Lei to 15.6 million Lei, representing a decrease in losses of 63 percent. Further investments in cleaner and more sustainable plants to offset the production from existing plants and investments in improvement in the T&D network to lessen the technical losses will be needed to reach a sustainable situation. Option 2: Gas engines-based CHP Project financial analysis A high-level financial analysis of the project has been run over 20 years. This option would generate (4x) times more electricity than the previous one (168,000 MWe vs. 40,000 MWe) and Colterm may not be able to sell this surplus, making it unlikely that estimated heat and electricity revenues (estimated at €30 million annually) would materialize fully. Capex for this second alternative is at the same level as that of the previous alternative presented (i.e., €25 million). Nevertheless, annual opex is estimated at around 7 times that of the first alternative, at €22 million per year, due to the high utilization of gas (around 350,000 MWh/year). While the project would yield an acceptable IRR taking into account electricity revenues (13.2 percent), heat only generation would make it unsustainable financially, with heat revenues at €8 million annually. Impact on Colterm’s financials The impact is very comparable to the one of the previous alternatives. Average annual EBITDA over the 10Y period is (+3.3) million Lei. However, this includes electricity revenues. 72 Financial analysis of the renovation strategy for multi-apartment and public buildings To assess the investment needs for renovations, the average costs (per square meter) are taken from the Long-Term Renovation Strategy (LTRS) and adjusted using the construction price index for 2019-21. Thus, the average investment would be €150 per square meter for residential MABs and €240 per square meter for public buildings, and the projected potential for investment is estimated at €570.83 million, as shown in the table below. Estimated costs were verified by comparing them to costs from implemented renovation projects in Romania and other Eastern European countries (Bulgaria, Lithuania, Poland) as well as with the investment costs provided in the Romanian LTRS and adjusted to the current construction cost index of 2022 Q1. Building-renovation scope and energy efficiency measures were considered the same as those proposed in the Romanian LTRS stage 1 for the same type of buildings. Following the renovation of 80 percent of residential MABs (both connected and disconnected from DH) and 85 percent of public buildings connected to the DH system, total heating savings of 50.3 percent will reduce heating demand by 383,980 MWh annually, compared to the current average annual heating consumption of 764,259 MWh. The DH customers will save 183,435 MWh or 39 percent compared to the current average annual heating consumption of 466,916 MWh. This projection – as well as other factors like city growth, new buildings, and disconnections – must be taken into account for the design of capacities and distribution systems of the DH. Table 19. Renovation scope Share of the DH Heating consumers consumption that need Investment before Expected No. of building Useful area value (M renovation energy Buildings consumers renovation (M m2) EUR) (MWh/year) savings (%) Residential MABs 667,690 80% 3.28 M 491.59 M 702,553 50.0 Public buildings 339 85% 0.33 M 79.24 M 61,705 53.0 Total 68,030 3.61 M 570.83 M 764,259 50.2 Source: National Long-Term Renovation Strategy of Romania. Residential MABs Expected energy savings for residential MABs are 50 percent, based on the average savings achieved following the renovation of MABs of similar scope and type in Timisoara. Table 20 shows the results of the various scenarios combining investments cost (in EUR/m2), heat energy tariffs (in lei/Gcal) and expected energy savings. The scenario with €150 m2 invested in MAB renovation, with an expected 600 lei/Gcal (€10.3 c/kWh) tariff, can result in 100 kWh/m2 of savings and a 14-year payback period. This scenario was considered as most expected based on the three variables analyzed. 73 Table 20. Payback period in years (MABs) with savings of 80 kWh/m2 per year (50%) Note: MAB = multi-apartment building. Source: World Bank’s own assessment of data from the National Long-Term Renovation Strategy of Romania. Romania’s LTRS recommends that municipalities prepare priority list(s) for the renovation of MABs with proposals from apartment owners and owners ’associations for the renovation of their buildings, providing financial support from public funds. If apartment owners refuse the renovation proposal, they risk losing access to financial support from public funds in the future. Priority in this list will be given to the lowest-performing segments in the building stock. The following criteria were considered for the establishment of the priority buildings in the LTRS, and could be applied to Timisoara: • Construction year before 2000 (lifetime of more than 20 years from the construction date). • Specific final energy consumption above 300 kWh/m2 per year. • Specific final heating energy consumption above 200 kWh/m2 per year. • For multi-family buildings, more than 30 percent of apartment owners fall into the category of “most vulnerable people” and receive various forms of grants/subsidies. Buildings are well connected to the DH system. Public buildings The public buildings scenario analysis assumed 100 kWh/m2 in energy savings with the expected 240 €/kWh investment cost and 600 lei/Gcal tariff that could result in a 23-year payback period. This was considered the most likely scenario to achieve. Other scenarios with investment value below €240/m2 could be considered as optimistic considering recent construction price increases. 74 Table 21. Payback period in years (public buildings) with savings of 100 kWh/m2 per year (53%) Source: World Bank s own assessment with data from the National Long-Term Renovation Strategy of Romania. Buildings owned by public institutions have high visibility in society. Therefore, the energy refurbishment of public buildings is aimed not only at reducing energy consumption, but also at encouraging similar actions in other sectors and among other stakeholders as well. This “lead-by-example” role of the public sector in energy refurbishment of buildings (and in energy efficiency in general) is emphasized in EU directives on energy efficiency (EED), energy performance of buildings (EPBD) and renewable energy sources (RES). Scenarios for building renovation programs’ implementation pace Three scenarios, each with a different program implementation pace, were analyzed for the remaining MABs connected to the DH, with each scenario renovating all MABs by 2030, 2040 and 2050, respectively (Table 22). Based on the current financial and technical capacity, scenario 3 would require a relevant amount of resources; however, renovation processes would continue up to 2050. Scenario 1, on the other hand, would create a large burden for the municipal budget (amounting to 21.62 percent), even though part of the funds could be provided by the central government. It would thus be advisable for Timisoara to consider Scenario 2, which would expect to complete all MABs renovation by 2040, considering that part of the funds will be received from central government budget (e.g. EU funds or funds borrowed by the municipality or by financial intermediary established by municipality). Funding options and mechanisms are discussed below. Table 22. Three scenarios for renovating MABs Share of No. of No. of Useful area Total Timisoara's Total buildings apartments renovated a renovation annual investment renovated a renovated a year (M cost a year budget, 2021 need by 2030 Scenario year year m2) (M EUR) (%) (M EUR) Scenario 1: renovate all 385 8,461 0.51 M 61.45 M 21.62% 491.59 M MABs by 2030 Scenario 2: renovate all 171 3,761 0.23 M 27.31 M 9.61% 218.49 M MABs by 2040 Scenario 3: renovate all 110 2,418 0.15 M 17.56 M 6.18% 140.46 M MABs by 2050 75 Note: MAB = multi-apartment building. Source: World Bank’s own assessment with data from the National Long-Term Renovation Strategy of Romania. In order to renovate all public buildings by 2030, approximately 41,000 m2 of useful building area or 50 institutions annually should be renovated. Each of the three scenarios could be considered; of the three, scenario 2 (with expected completion of all public buildings by 2040) has the most feasible implementation pace and would require a reasonable amount of municipality’s budgetary and administrative resources to implement. Taking into account a parallel MABs program for public buildings, scenario 2 may be the most feasible option. Table 23. Three scenarios for renovating public buildings No. of institutions Share of with Timisoara's Total renovated Useful Total annual investment buildings a area (M renovation budget, 2021 need by 2030 Scenario year m2) cost (M EUR) (%) (M EUR) Scenario 1: renovate all PBs by 2030 50 41.27 k 9.9 M 3.48% 79.24 M Scenario 2: renovate all PBs by 2040 22 18.34 k 4.4 M 1.55% 35.22 M Scenario 3: renovate all PBs by 2050 14 11.79 k 2.83 M 1.00% 22.64 M Note: PB = public building. Source: World Bank’s own assessment with data from the National Long-Term Renovation Strategy of Romania. Timisoara’s MAB and public-building renovation programs shall include measures to combat energy poverty to ensure access to financing for socially vulnerable groups. These measures must be accompanied by other relevant policy actions, such as the future DH strategy and the optimization on the focalization of heat price subsidies. The support for energy efficiency measures must follow the focus of social support. Financial and institutional mechanisms for multi-apartment building renovations The gap analysis performed in Romania during the development of the new LTRS identified several challenges related to the financing of energy-efficiency investments in buildings. The overall market is dependent on EU and IFI financing and funding, with minimal leverage and co-financing; this is neither sustainable nor scalable. There is a dependence on grants and expectations for continued grants – and a lack of development of financing instruments that could better serve these sectors. There is thus a critical need to redesign these programs away from budget support and grants and toward a greater use of revolving schemes, reduced levels of grants over time, and more efforts to leverage commercial financing sources. The following are the main challenges and practical solutions: • Difficulties encountered by MABs apartment owners in obtaining commercial financing and providing co-financing. This challenge can be solved partially by designing public financial 76 instruments. Under a municipal residential energy efficiency (EE) program, a repayable financial instrument in combination with a grant (EU/national/local) could be introduced so that households will not be required to provide co-financing. This financial instrument would cover all up-front financing requirements, thus increasing homeowners’ access to financial resources for building renovations and not requiring homeowners to mortgage their apartments. Instead of linking a loan or another repayable instrument to the homeowner, it is possible to link it to the apartment and put in place on-bill repayments in the same way as utility bill payments. Appropriate legal adjustments would be required to facilitate such a mechanism. • Limited public financial resources to finance MABs renovation programs. A public financing mechanism can be developed under the residential EE program. Such a mechanism can leverage additional financing from IFIs and commercial banks and continue as a revolving instrument from repayments of investments. Apartment owners can repay only the repayable part of investments, which could be covered from the energy savings achieved following the thermal modernization of the building. The non-repayable part of the investment would be a grant that would be provided from public funds (EU/national/local). Overview of financing products Residential EE programs in the region typically use the following financing products: • Grants • Loans blended with grants • Repayable grants. Timisoara city authorities will need a systematic approach to design the most suitable financing products, which could be blended or co-financed with national financing mechanisms in the future. A well- functioning investment repayment mechanism that is acceptable and affordable to apartment owners, is key for the successful design of financing products and ensures sustainability. Financing options from the building/apartment owner's perspective – i.e., share of the grants and repayable instruments – are summarized in Table 24. However, the ratio of the grant and repayable part will depend on the capacity of apartment residents to repay the financing instrument, which usually should not exceed the total amount of the energy bill before implementation of investment. Table 24. Financing options Advantages Weaknesses Option 1. Grant (100%) • Attractive to the building/apartment owners • Requires sufficient public finance resources • Simpler to administer than a loan • Reduces incentive to seek investment efficiency Option 2. Grant (40%) with owners co-financing (60%) 77 • Same as in Option 1 • Same as in Option 1 • Ensures more discipline for project and • Difficult for many apartment owners to secure owners' involvement required own co-financing Option 3. Pre-financing grant (100%) with repayable part from owners (60%) • Ensures more discipline for project and • Requires sufficient public finance resources owners' involvement for the non-repayable part of the grant • Recycling of grant repayments to new projects • Need for specific programs for vulnerable • Delivery mechanism less complicated than a groups to support repayments loan • Less attractive to the building/apartment • No immediate co-financing required from owners than a grant building /apartment owners Option 4. Loan (60%) + grant (40%) • Ensures more discipline for project and • A more-complicated delivery mechanism than owners' involvement a grant • Facilitates private finance sector participation • Need for specific programs for vulnerable • Recycling of grant repayments to new projects groups to support repayments • No immediate co-financing required from • Less attractive to the building/apartment building /apartment owners when a loan is owners than a grant used for pre-financing Source: Authors Structure of public financing schemes Two financing and implementation schemes (A and B) are proposed based on the experience of Romania and other countries in the region. Key features of the two analyzed schemes are described below. The municipality or municipal company (e.g., new designated company, buildings management company, DH company, electricity company) acts as a “one-stop shop” in organizing all renovation process on behalf of the housing community. It incurs the capital cost of the EE upgrade, which is repaid through the utility bill. The municipality or the utility thereby effectively takes on the role of a financing entity in addition to selling heating or other communal services. Regarding on-bill repayment, the upfront capital is provided by a third party, typically public or private financial institutions, rather than the utility. In exchange for a management fee, the utility or another Implementing Intermediary acts as a repayment conduit, collecting the partial re-payments through the bills for the original lenders. It is also possible to tie the cost recovery for an EE investment to the property’s surface area (m2) rather than the property owner, which means that partial re-payments remain in force regardless of a change in occupancy. This repayment-based on-bill model allows customers to rent or sell apartments in renovated buildings without limitations, in which case the next owner/tenant can either repay the EE investments in full or continue with monthly on-bill payments. Disconnections from the district heating system should not be contractually possible during the repayment period unless the homeowner pays off the balance and fulfils other obligations. These requirements may help resolve the dilemma of split incentives 78 between tenants who rent apartments and want to benefit from EE improvements, and owners who bear investment costs and usually do not want to invest in energy efficiency. Characteristics of financing scheme A The local authority mobilizes funds from its own budget revenues, national government grants or EU grants, IFI loans, international capital markets or local banks. For the initial phase of the program, the local authority serves as the borrower which mobilizes all up-front financing required for renovation. The local authority then channels the funds to the procured contractors, which perform renovation works for the beneficiaries (i.e. the apartment owners). The local authority could act on behalf of the Housing Communities (HCs) and become sub-borrower of the project renovation funds that apartment owners do not require to mortgage their apartments. Partial repayment of investments would be linked to the apartment but not to the apartment owner. HCs can receive EE project management and financing services from the municipality following a majority vote by the homeowners; in this case, HCs would not need to take loans directly from banks, perform procurements, oversee renovation works, manage investments, and collect repayments from each homeowner. However, HCs must be able to participate in key decision making and appoint qualified people to oversee the renovations. Homeowners’ monthly re-payments of partial investment should be enforced, e.g. through the same legal enforcement mechanisms as for the payments of other utility bills. Figure 23. Financing scheme A Source: World Bank’s own assessment based on experiences in other countries in Europe and local conditions in Romania. Characteristics of financing scheme B Scheme B includes a similar institutional set-up and roles as described in scheme A; the only differences are that (i) loans are mobilized by the intermediary company (utility company, DH company, etc.) rather 79 than by the municipality and (ii) all implementation tasks are managed by the Intermediary company acting on behalf of the HC. The implementing company can take loans from commercial banks/IFIs with the local government’s guarantee or approval, depending on the legal requirements for such arrangements. The non-repayable part of the grant is provided by the local authority. The implementing intermediary can have some financial losses in such arrangements. The repayments for low-income families can be covered by the municipality to reduce such losses and to motivate low-income families to vote in favor of renovation in general meetings of the HC. If the intermediary is the DH company, it could explore possibilities for additional revenues, e.g. by from maintaining the internal heating system or installing renewable-energy production sources (solar rooftop) in MABs. Figure 24. Financing scheme B Source: World Bank’s own assessment based on experiences in other countries in Europe and local conditions in Romania. To conclude, both scheme A and B or variations of these schemes can be selected depending on the availability of financial resources and the willingness of the local authority to design a repayable mechanism combined with grants from public resources to the apartment owners. For example, instead of giving a grant, the municipality can invest in repayable instrument. As for the role of the intermediary company, it is important to select technically qualified entities, which can mobilize financial resources from loans in the case of scheme B. According to a recent Timisoara city report26, 578 consumers in 2020 received a heating subsidy. If the proposed building renovation program is implemented, these building owners would be socially vulnerable groups who would need additional support to pay back investments. Additional support for the implementation of renovation measures for socially vulnerable people in the worst energy-performing buildings consists in reducing the burden of energy costs by offsetting all or part of the investment costs 26 Starea economică, socială şi de mediu a Municipiului Timişoara, 2020. 80 for vulnerable owners in multi-family buildings. Such intervention would require a budget from €250,000 to €350,000 annually for the next 10-15 years. This budgetary estimate was determined considering that 40-60 percent of the investments would be paid back by residential owners. Impact of EE renovation program on the financial performance of Colterm In line with scenario 2 of the renovation program described above, the analysis considers that, respectively 80 percent and 85 percent of MABs and PBs useful areas would be renovated by 2040. 60% of MABs and PBs useful areas are renovated by 2031. The decrease in the heat consumption form future renovations has been implemented into the model to gauge its impact on the SOE financials over the 10-year projection period. Only savings on households connected (representing 43 percent of total households ’savings) have been considered in this section in addition to all PBs (considered all connected to the DH network). Table 25. Colterm financials under BAU and EE renovation program scenarios Source: World Bank estimates, based on Colterm data. The table compares the two scenarios in terms of revenues, opex, EBITDA, and net profit. Most of operational savings would be made on the variable cost (purchase of gas, coal and associated carbon tax from heat production). The savings on the T&D part will be minimal and made on the variable chunk of this cost. As expected, the EE slightly improves the financials as EBITDA increases by an annual average of 9 million Lei (equivalent to 1.8 million euros/year). Nevertheless, the situation remains unsustainable (EBITDA still negative) for the district and the SOE as losses will keep accumulating even if in slightly lower figures. The improvement of the global situation of the DH system will need extensive investments in the production and T&D networks. E. Governance Throughout the summer of 2021, the city hall made efforts to reform the corporate governance of the municipally owned Colterm (in line with Ordinance 109/2011) and to prepare the documentation required to extend the concession contract, which involves defining the relationships of the city hall as owner and 81 the DH company. The current insolvency process, and the complications arising from the difficulties of providing heating during the winter 2021/2022, put the process on hold. The following section highlights (a) the broader governance reforms in the municipality to set the stage for the preparation, adoption and implementation of a sustainable heating / energy strategy; and (b) the corporate governance reforms of the municipal company that will likely be set up to fill in Colterm’s role, based on Law 111/2016, which aligns with most of the OECD recommendations for corporate governance of state-owned enterprises (SOEs)27 including protection of minority shareholders; rationale of state ownership; mandates of SOEs based on such rationale (“letters of expectations”); and performance criteria for competitively selected board members and managers, based on management plans. The case for a broader approach The insolvency procedure provides a window of opportunity for the municipality to reassess the plans for the best institutional structures that would need to be put in place for the implementation of a sustainable municipal energy strategy. That is, Colterm’s insolvency gives the municipality some time and an opportunity to start from a “clean slate”, beyond setting up a new company with exactly the same roles as the old “Colterm” cleaned of its financial issues and liabilities. A revision of institutional structure should cover a broader, more efficient allocation of responsibilities and functions concerning municipal energy, in which DH and energy efficiency in buildings are only two of the key components. Such an approach would allow a better allocation of resources inside the municipality to ensure sustainable heating at lower costs, e.g. to reduce subsidies for heating by investing more in energy efficiency in buildings or finding neighborhood solutions in a coordinated manner. Thus, the municipality must take the time to consider: • Among the key actions in its future energy strategy and road map, which responsibilities should remain with the municipality itself (undertaken by departments of the city hall), how to streamline the activities of existing departments, and which functions should be “externalized” to new entities, such as commercial companies or subordinated agencies; and • The definition of both the proper missions of each of the separate entities and their relationships (budget, accountability) with the municipality, which retains the ultimate responsibility for sustainable heating in the city. In the broadest sense, this also includes a revision of the business model for the provision of heating – including public and private sector participation. Globally, there are many ways of organizing a governance structure at municipal level for district energy, and these vary significantly depending on the institutional culture, history of provision of heating in the city, institutional capacity at the municipal level and the objectives and targets that the municipality plans to achieve in the sector. In the case of Timisoara, the governance structure and business models for the provision of heat must start from several local specificities, such as: • Public ownership of assets of a rather extensive DH system, with declining household demand, resulting from individual disconnections of households in multi-family apartment buildings. • A system architecture that is obsolete (because designed for energy needs as of 1960-1980) but which must respond to more recent urban developments, urban developments in the next 27 “OECD Guidelines on Corporate Governance of State-Owned Enterprises,” https://www.oecd.org/corporate/guidelines-corporate-governance-soes.htm. 82 decades and decarbonization goals by 2050. This also entails the need to transform a 2nd generation DH system into a future-oriented, 4th generation system. • A large share (over 50%) of households, spread across the city, are currently not connected to DH. Non-household heat consumers, with the exception of public buildings, have generally opted for individual solutions, but their energy consumption has an impact on the local community, e.g. air quality, emissions, and competition with DH for primary heat sources such as gas. There is no district cooling in Timisoara, but in the future this may also be an option to be explored, particularly as more energy may be in demand for cooling by 2050 than for heating. In general, an institutional structure should allow enough flexibility so as not to foreclose options to integrate new services for consumers and new sources of energy, particularly low-carbon sources. • Low consumer confidence and little community buy-in into the DH system and resistance of stakeholders concerning municipal provision and regulation of heating because of the declining quality of DH service in recent years. These local characteristics limit the range of options for structuring an appropriate governance architecture for heating in the city. Models that may work in northern European countries such as Denmark or Finland would not be applicable: such countries have growing DH systems and a history of strong local governance, and heat provision is viewed more as a community service in which citizens and businesses have a clear stake and to which they actively contribute. Also, an appropriate governance model for Timisoara must be different from that of countries and cities where heating has been historically individual and district heating/cooling solutions are only now being introduced (e.g. the Netherlands), with various forms of regulatory incentives and limited planning from municipal authorities. At the same time, in each country there are various constraints on governance structures that are outside the control of the municipality, such as the overall legal framework at national level. In Romania, the municipality has a specific obligation to continue the provision of DH as a local public utility. The natural monopoly infrastructure (transport and distribution networks) belongs to the municipalities and can be administered in various business models, either in-house (“gestiune directa”) or administered by some other entity, municipally-owned or private (“gestiune delegata”), either by a concession or procurement of services. These constraints will be applicable after the finalization of Colterm’s insolvency and the setup of a new municipal company. The overall institutional restructuring – to optimize the heat provision for broader climate objectives using available local resources – would need to integrate such constraints. Top-down governance with a broad range of responsibilities Given the context summarized above, in the case of Timisoara, the provision of sustainable heating to the entire city and the reform of the current DH system will by necessity be rather “top-down”, ensuring the transition from the current obsolete “DH + individual” or ad hoc solutions to a more sustainable model of energy provision. As a consequence, the city hall will have to undertake all of the four key functions identified among cities which have demonstrated best practices in DH: planner and regulator; facilitator of financing; provider and consumer; and coordinator and advocate28. 28 https://www.enwave.com/pdf/UNEP_DES_District_Energy_Report_VØJNC122.pdf. 83 1. Local government as planner and regulator The city hall of Timisoara is currently legally required to adopt a local DH strategy; hence its focus on DH and its approach to governance as referring mostly to the setting up of a new DH company to continue the activity of Colterm. A broader sustainable-energy strategy for the city (in which the DH strategy would be a component, along with the plan for energy efficiency in buildings) should go beyond DH to comprise clear objectives and targets for meeting overall heat/energy demand for all consumers, regardless of their source of heat supply. Municipal targets may include, for example, a certain share of renewable energy for overall heat provision in the city; a certain level of emissions for heating; energy efficiency targets (including for buildings); or access to heating by certain categories of consumers (e.g. affordable energy for poor households). This means it should be included in higher-level strategies and plans, as the broader objectives of reducing GHG emissions or improving energy efficiency are interlinked with other sectors. For example, Timisoara should have a municipal GHG target (in line with national commitments) and detail the achievement in heating by imposing a RES target or an energy efficiency target for heating. The table below illustrates several examples of strategies and energy/climate objectives of selected cities in the EU. It should be noted that cities are developing local energy or heating strategies that are linked with the Sustainable Energy Action Plans developed under the Covenant of Mayors. Timisoara has also been a member of the Covenant of Mayors since 2012 and submitted at the time a SEAP; however, the implementation has not been followed through and the document is mostly formal. SEAPs include much broader objectives for energy use and resources in the city, well beyond heating (e.g. transport, electricity etc.), though the provision of heating and energy efficiency in buildings are generally the most important components. Thus, city halls prepare a set of documents which should be hierarchical and interconnected, providing different levels of detail for specific areas (e.g. heating should be “embedded” in SEAP). In practical terms, this also provides an advantage for the municipality. The Covenant of Mayors is a platform that allows exchange of experiences among participating municipalities and has issued various sets of guidelines how to develop the various elements of strategy, and Timisoara needs to renew its participation and become an active member. Table 26. Examples of strategies and energy/climate objectives of selected cities in the EU Amsterdam Amsterdam Agenda on Sustainability Targets: -40% GHG by 2025, -75% GHG by 2040; - 2015 20% energy consumption per capita; +40,000 dwellings connected to DH; +18 MW wind power; + 151 MW solar Berlin Integrated Energy and Climate Targets: GHG only (-40% by 2020, -60% by 2030, - Protection 2016 85% by 2050 Paris Paris Climate Action Plan GHG targets (-75% by 2050), RES targets (25% by 2020) Stockholm Sustainable Energy Action Plan updated -80% GHG, -80% non-RES energy consumption, 20% 2020 RES Vienna Smart City Framework Strategy 2014 -40% energy consumption by 2050, -80% GHG per capita, primary energy input 2000 W/cap, 50% RES by 2050 (20% in 2030) Warsaw Strategy for Development, Sustainable -80% GHG, -80% energy consumption, 20% RES Energy Action Plan updated 2020 84 Zagreb Sustainable Energy Action Plan updated -21% GHG by 2020, 20% RES 2020 Source: World Bank In this sense, the local heating strategy should go beyond its current focus on maintaining the DH and avoiding future disconnections and should be embedded in overarching plans for energy management in the city. The heating plan itself should examine the total heat demand in the city – including consumers that are currently not connected to DH (such as those living in new residential areas) or that have disconnected in recent years. The goal is to find the best instruments for achieving broader goals. For example, efforts to decarbonize heating may include connecting new consumers to DH or identifying low- carbon solutions for neighborhoods that are not connected to DH (or for which the current provision of heating through the DH system is too costly). 2. Local government as facilitator The City of Timisoara should help catalyze financing for heating and for the DH, ensuring a coordinated approach to reach the overarching strategic goals (e.g. reduction of GHG, energy efficiency, or a certain target for renewables). The city hall is also the owner of major assets in DH (heat generation and networks). Currently, the municipality’s largest heating-related expenditure is the subsidy for the tariff. There are significant grant funds available, however, for investments in DH and building renovation. Beyond directly providing financing for improving heating services to the city, Timisoara has an important role to play in setting up a conducive framework to leverage funding for investments in DH, from both the public sector (including EU funds, as described in the first section) and the private sector. Different types of incentives can be used, depending on the level of participation of the private sector in the DH project to be implemented. In all cases, the municipality’s role as planner and policy maker, and its capacity to set a clear strategy for DH development, are key to setting up an adequate policy and planning framework that allows all actors, public and private, to get involved. In cases where interventions include private sector funding, financial and fiscal incentives (such as loan guarantees, bond financing and grants), optimized city asset management and demonstration projects can help attract the private sector by lowering financing costs and demonstrating the viability of innovative approaches that are seen as risky by the private sector. The table below summarizes the available potential funding for various components of the heating plan of the city. After the preparation of the heating strategy and plan, the municipality should match the needs with the available sources of financing from the list below. This is also very important as it will help clarify which areas can be supported within the available envelope of the municipal budget (also taking into account the cofinancing needs for grants) and for which private sector participation would be required, requiring a thinking of the business model. It should also be noted that budget/grant financing can leverage private funding and lending in various mechanisms, e.g. as illustrated in the section on financial instruments for energy efficiency in buildings. Table 27. Available potential funding for various components of the city heating plan Tariffs from Municipal Grant funding consumers budget via municipality Other state aid Private funding 85 Networks Operation Heating bills Subsidies for Central (salaries, tariffs government materials, added bailouts water etc.) Maintenance of Component of Municipal networks heating bills subsidies for tariffs and maintenance works Investments Component of Non-eligible National budget Possible private heating bills works for EU (Termoficare investment / funds, program); EU public-private cofinancing of funds - OPs (e.g. EU/national LIOP 2014-2020, funds SO 7.1) Generation Operation (fuels, Heating bills Subsidies for Central Cogeneration Possible private CO2, salaries, tariffs government bonus; subsidies investment / materials etc.) bailouts for various fuels public-private (e.g. cheaper gas from SOE Romgaz or by regulation of gas prices) Maintenance of Component of Municipal plants heating bills subsidies for DH Investments in Component of National budget modernization of heating bills (Termoficare existing program) capacities Investments in Component of EU: Private new capacities, heating bills Modernization investment or including Fund, NRRP; public-private neighborhood Other donors (e.g. Swiss, Norwegian funds) Energy demand Investments in Co-financing of Local grant EU funds (e.g. ESCO, lending reduction (EE in insulation and owners (see also cofinancing / ROP, (see financial buildings) heating source financial savings from Modernization schemes above) schemes above) subsidy for Wave / NRRP) heating Determining the amount of financing required to achieve the municipality’s objective generally also raises the question of the most suitable business model. Most business models for municipal heating globally entail a strong involvement of the local government, and the most common business model is the “wholly public” model, where the city hall has full ownership of the system. This allows the municipality to steer the development of heating while having strong accountability for the targets (emissions etc.) assumed in the strategy. However, there are also “hybrid public and private models”, in which the municipality can involve the private sector in various ways. These can include public-private joint ventures in which the private sector may invest in certain areas of the heating system; or provide services to a specific neighborhood; or become involved in the provision of new services, such as district cooling or a new form of renewable heating (thus contributing to the broader objectives of the sustainable energy strategy of the city). 86 Another very common model is a concession contract, which can also take many forms beyond the concessions typically found in Romania for DH (applicable both where the DH provider is a private concessionaire or a municipally owned company), and which generally cover the operation of existing infrastructure. Other concession-type contracts could emerge when the municipality is involved in the design and development of a specific project that would be later developed, financed and operated by the private partner and for which the municipality has the right of buy-back at the end of the concession period. In the case of Timisoara, several options can be examined: • A fully public model where the heating will continue to be supplied by a municipally-owned company such as (previously) Colterm. The functions of the company can be revisited (see also the subsection below on governance of DH SOE.) • A public/private model. As illustrated earlier, the city hall of Timisoara will identify certain areas in which the current provision of heating through the centralized system is no longer sustainable. In these areas, the municipality can seek private sector investment. In practice, this would mean that the DH company (or the city hall, depending on how the responsibilities are split) can launch a competitive process to select a provider of heating solution for the area. The main constraint is the availability of data on resources and heating needs. This is where an “energy mapping” exercise, explained in detail below, can play a critical role. Essentially it will help “crowd-source” information from local players and attract possible solutions. The municipality can organize a competition for solutions, providing the key end-targets (e.g. provision of certain amounts of heat at up to X emissions), and decide transparently on a specific solution. The more public the data available in the energy mapping, the less contested the result. • A full concession of the DH system to a private company. In general, concessions of entire DH system are the typical institutional setup in Romania for DH, whether the operator is private (such as previously Ploiesti and Iasi, or water and sewage in Bucharest) or a municipally owned SOE. In Romania the concessionaire typically only operates the network, with the municipality retaining full discretion over network development and investment plans. However, the responsibilities may be allocated differently between municipality and the company, e.g. with the company having stronger decision-making powers on how to develop the heat provision business, provided it meets the broad objectives of the municipality. The split of responsibilities depends critically on the capacity (at municipal level) to steer the development of the heating and maintain control over the end results, as defined in the terms included in the strategy (target emissions, target energy efficiency or renewables, etc.). This means that if the municipality leaves more decision- making powers to the private sector, the concessions must be on longer terms to allow for long- term development of the system, and the municipality requires a very strong internal regulatory capacity. The municipality as a regulator must be capable to analyze critically the DH company’s business plan, ensure that it is implemented, tariff regulations are consistent with the plans, and the objectives in the municipal strategy are met. The choice of one or a combination of these models depends on local conditions, the capacity of the local administration, and the financials for the provision of heating. The private sector would be interested in segments of the business where there is a business case: either it is profitable to recover the investment from end-user approved tariffs, or there are municipal subsidies or other forms of guarantees of a steady 87 flow of revenue. In the latter case, the municipal support in the form of subsidies or guaranteed stream of income (e.g. purchase of heat directly from the company at a guaranteed price) needs to meet the state aid requirements of the EC. This means that an in-depth analysis must be performed to ensure that the profits made by the private partner will not be excessive and the support is justified in terms of Services of General Economic Interest. In brief, this would require a clear contribution of the support from the municipal budget to achieving the objectives of the strategy and a justification that the amount of support is the most cost-effective manner of achieving the particular objective (energy efficiency, uptake of renewables etc.). For the city of Timisoara, the choice of a business model can be gradual. The city hall is likely to start by setting up a municipal company, with possibly a few additional functions than Colterm; preparing the energy map; contracting out some small projects as pilots; then considering a broadening of private sector involvement. 3. Local government as provider and consumer As noted previously, the city hall is responsible for providing heating to the city in the centralized system. Depending on the development of the decentralized heating solutions (e.g. neighborhood, individual buildings with green energy, etc.), the municipality may also consider providing redundancy for the decentralized smaller systems: e.g. a smaller transport network providing access to alternative sources of heat if the local decentralized solution may cover optimally only a part of the demand or as a backup. It should be noted that in developing DH systems (e.g. Denmark, Netherlands), there is a natural development from localized networks to a broader city-wide system, for backup. At the same time, Timisoara municipality is responsible for other key local utilities beyond heating: water and sewage, public transport, public lighting, and (in part) waste management. There are two implications: • Functions must be properly allocated among utilities to ensure clear responsibilities and avoid overlap. For example, non-core activities for the DH company, such as water pressure managed by Colterm, should be moved to the proper water provision service at Aquatim. • Optimizing the DH system requires coordination between the other utilities it provides as a potential source of heating. For example, the municipality may consider sources of heating from waste or sewage, which are also managed or regulated by the city hall. The city hall is in a unique position to coordinate and shape service provision by making use of alternatives from the private sector or other public institutions, in accordance with carbon mitigation goals. For instance, many large cities in Europe have taken advantage of public ownership of distribution and transmission to use wastewater or waste heat from industry and data centers for their energy networks. There are today numerous examples of cities (London, Rotterdam, Toronto etc.) which have successfully managed to launch cross-sectoral projects that leverage collaboration between various municipal services sectors, to mutually benefit each other. In the case of Timisoara, one discussion in recent years concerned the possibility to access heating from a potential waste-to-energy project. Until currently, the project has not materialized. The main issue was the fact that the project was out of the control or influence of the city hall (the waste management belonging to the county council, which intended to install an incinerator), and including the incinerator in the DH required significant decisions on the future design of the DH system. One way to deal with such 88 situations is for the city hall (through its DH company) to simply provide an option to purchase heating from a source after it becomes available. The DH would be looking strictly at the demand such source may cover and the alternative heating options for the same demand, instead of structuring the entire DH system around a source out of the city hall’s purview. Last but not least, the local government is also a large consumer of heating services in the city. It owns municipal buildings over which it has full control of the choice of heating source and energy efficiency measures (the only constraint being the available funding sources and project-preparation capacity). The ownership of municipal buildings (schools, public institutions) not only provides for a powerful demonstration potential, through pilot projects in public buildings (promoting energy efficiency as well), but also gives the city leeway to set an overall example for the future development of heating in the city. 4. Local government as a coordinator and advocate Beyond the roles described above, Timisoara is in a unique position to advocate to a wide range of actors in order to reach its strategic vision. The key roles that we envisage for Timisoara city hall are as follows: • Market facilitation for heating, coordinating multi-stakeholder engagement • Awareness-raising and outreach • Advocating for DH at various other levels of government (e.g. national, county). Thus, the city hall is responsible for identifying the needs for sustainable heating in the city, which also include various ways to stimulate the development of alternative solutions to the current centralized DH system that are sustainable economically and from the point of view of the city’s strategic objectives defined in point 1. This may include, for example, neighborhoods with decentralized energy. As will be explained below, the “energy mapping” exercise designed to publicize data on which policy decisions can be made for the preparation of a plan may also be turned into the key instrument to engage multiple stakeholders and ensure trust and buy-in for a sustainable energy strategy. There are various examples of such “energy mappings”, which can also be embedded in other strategies for development at local level, e.g. urban planning in general. Below, the example of the Amsterdam “energy atlas”. In brief, the municipality prepares maps comprising various types of information, such as: existing and projected consumption; existing and projected building density; sources of energy, including surplus of industrial/commercial heat supply; existing networks (DH, electricity, gas); land ownership and barriers for specific investments in various areas (e.g. limited available space, construction constraints); and socio-economic indicators (to identify fuel-poor areas). The map below illustrates the valuable information that can be aggregated with regard to heating demand and potential alternative sources of energy that could be accessed by consumers in a centralized system or decentralized system / neighborhood. Timisoara could develop a similar type of “mapping” as a tool to: communicate with stakeholders and raising awareness; collect data from external sources (localized consumers and potential sources of heating); and identify areas where changing the current system is needed and where additional information can be collected through additional means, e.g. in-depth interviews or locally driven project ideas. 89 Figure 25. A map from Amsterdam’s “energy atlas” Legend: Red lines: existing DH network, connected load - yellow squares, suppliers of heat - orange circles. Potential residual/waste heat sources: hospitals (green circles); data centers (blue circles); supermarkets (yellow), offices (purple). The roles of the local government, as well as the need for a certain structuring of the governance system, become apparent when walking through the steps of the preparation of the strategy and its implementation. For Timisoara, the preparation of a heating strategy will require: • “Energy mapping”: A detailed understanding of local demand for heating, as well as research on the available resources of primary energy. The sections above illustrate information for which data is currently available at city hall level: an estimation of demand in district heating only and national-level assessment of resources, e.g. on geothermal, renewables, gas and coal availability. Much more detailed data is required for the preparation of the strategy, e.g. Warsaw has detailed data on heat demand by district and type of building as well as granular data on renewables such as solar power intensity by area. Based on this information, neighborhood-area solutions should be fine-tuned, depending on local demand for heating (and possibly electricity in cogeneration) and on local sources of primary energy (e.g. renewables such as geothermal, but also gas depending on available gas network infrastructure etc.). • An understanding of the planning instruments available at municipal level, within national-level constraints. These consist of taxation (e.g. to incentivize/disincentivize certain forms of energy production); urban planning and permitting of new constructions and the like. For example: since 2021, all buildings should be “nearly-zero energy buildings”, according to national law and EU directives, though this has simply not yet been enforced anywhere in Romania. Another legally available instrument is the definition of “unitary heating areas” (areas where all buildings should have the same type of heating). “Unitary heating areas” are defined in national legislation on DH, but are poorly applicable in existing built neighborhoods because the poor quality of district heating generally makes it difficult in practice to prohibit individual disconnections. But this instrument could be used when permitting the construction of larger residential units, e.g. mandating one single type of heating for a building or for a group of buildings in order to receive the construction permit. To enforce such a regulation, the local authority needs to have prior 90 detailed knowledge of available heating sources and infrastructure in the area. Based on such knowledge, the condition should not be limited to the mandatory connection to a centralized system (e.g. existing DH network), but to the “greenest” solution possible in the area (solar, waste heat etc.). • Building capacity: the city hall needs to bring in specialists in energy (electricity and heating), thermal renovation of buildings to prepare TORs; and liaise with other municipalities to share experiences in developing heating plans. • Building a community dialogue. It is essential that the local community (households, businesses etc.) have a stake in a sustainable energy/heating plan for the municipality. The city hall will have to build confidence of the local community in the heating plan. DH cannot work properly if consumers continue to disconnect from the centralized system. Neighborhood solutions for heating require the identification of local heating sources (businesses, but also residential users) and their integration in the supply for the neighborhood. Corporate governance of a municipally owned DH company Regardless of the outcome of the insolvency of Colterm and the plans for the future, the municipality may continue to provide heating for the city under a municipally owned company. Should this be the final outcome, implementing strong corporate governance rules for this company will be essential to contributing to the goals of the municipality; and building an arm’s-length, contractually sound relationship between the local administration and the company will provide invaluable insights into structuring any form of public, private, or public-private model for the entire system or parts of it. According to the best practices of corporate governance for SOEs, the three main challenges faced by SOEs are to "professionalize the state as owner; to make SOEs operate with similar efficiency, transparency and accountability as good-practice private enterprises; and [where relevant] to ensure competition between SOEs on a level playing field” (OECD Guidelines). The relationship between the municipality and Colterm needs to be properly defined based on the existing legislation (Law 111). However, there are additional elements of good practice that go beyond the current legal framework and are implicit in the EU principles governing state aid and services of general economic interest. The OECD’s checklist of good practices offers guidance on corporate governance of SOEs in several areas. The remainder of this section discusses each of these areas in turn. Rationale for public ownership The municipality should prepare an ownership policy for all SOEs under its control, incorporating inputs from an extensive public consultation. The municipality should define (i) the rationale for the use of SOEs for the provision of certain public services and (ii) the type of arrangements (PPPs, private, concessions, etc.) required for the provision of the different public services. In the case of Colterm, this could mean transferring non-core activities and potentially undertaking additional activities like the provision of energy management services for consumers and buildings. Thus, the definition of the DH company’s functions can go well beyond the prior functions of Colterm, depending on what the municipality considers fit. E.g. will the DH company operate only the centralized system? Or also decentralized options? Will the DH provide other services, e.g. energy management, installation of equipment at consumer level, 91 district cooling etc.? The role of the DH company will depend critically on how the municipality sets the objectives and identifies instruments to achieve them. Ownership role of the public sector The local council of Timisoara was the single shareholder of Colterm and has appointed representatives at the company’s general shareholders meeting (GSM). Colterm is supervised by the energy department of the city hall of Timisoara. Well-functioning SOEs require operational autonomy from the owner. Inter alia, this requires a transparent, competence-based selection of the board. In this regard, the municipality organized a competitive selection based on ED 109/2011 in July 2021 and appointed new members of the board. The relationship between the municipality and Colterm is defined by the regulation of the DH service, terms of reference (TOR) for the service, and the delegation contract, which also includes performance indicators for the DH service (focusing on quality in the provision of heating). The Timisoara local council also approved the “letter of expectations” as a local council decision (152/2021), which includes provisions on the financial performance of Colterm. Although this framework clearly splits responsibilities and accountability between the municipality and Colterm, the implementation is suboptimal. It would be recommended to set up one or several units within the municipality to define the strategy and long-term objectives in the provision of the different public services. Such unit(s) would coordinate the activity of different SOEs and PPPs providing services within a sector – with responsibility for supervising operational and financial performance, following up on the achievement of the defined targets, and setting commensurate incentives. Competitiveness of SOEs DH distribution is a natural monopoly and heat provision is a public service of general economic interest (SGEI). However, competition in the DH sector can be incentivized in two dimensions: • The selection of the heating service provider – the operator – should be competitive. Also, to put private and public service providers on a level playing field, the royalty should be “set transparently and without discrimination to all potential operators of public utility services” (according to the documentation prepared by Timisoara for the Competition Council for the extension of the contract with the new Colterm). The Competition Council may supervise the selection process, contractual arrangements and potential service extensions. • If the municipality decides to extend the new Colterm’s mandate and assign the provision of other non-regulated services in the future (e.g., energy management services for heat consumers), the rationale for such decision should be well justified and those potential activities must be provided competitively, without benefiting from special support from the municipality – which may be considered illegal state aid. If the municipality chooses to allow or encourage the new Colterm to expand the scope of services provided, OECD guidelines and state aid practice in the EU should be followed. In particular: • The municipality should clearly separate regulated from non-regulated activities, and commercial economic activities from public policy objectives. EC Order 1121/2014 allows municipalities to provide state aid to the production, transport, distribution, and supply of heating to households, with a limit of €15 million per year for each DH for a transitory period – currently 2023 – or above €15 million with notification. Allowing state aid in these cases seeks to foster a higher-level 92 objective: to avoid disconnections and keep consumers in a system that is expected to achieve higher policy outcomes than the alternatives (e.g., individual gas boilers or no access to heat). State aid in this case may have two forms: o Support for lower tariffs for households (below recognized costs + regulated profit) o Local budget transfer for non-recognized losses on the network. • The municipality should provide full budget funding for costs related to public policy objectives. Separating commercial economic activity from public policy objectives facilitates proper accountability for the municipality as well as for managers and boards. On the one hand, the municipality must provide adequate and timely budget transfers to the new Colterm. Delays in the transfer of funds due to political interference result in eroded cash-flows, excessive indebtedness levels, financial imbalance, delays in investments, poor operation of the network and quality of service, and service disruptions. On the other hand, Colterm has the obligation to prepare plans to implement the mandate defined by the municipality, defining clear operational and financial targets. Equitable treatment of shareholders and other investors In the case of Colterm, the municipality of Timisoara will own 100 percent of the new Colterm’s shares. Thus, this principle would only apply to potential lenders and investors. Stakeholder relations and responsible business To limit potential conflicts of interest and corruption risks, the new Colterm needs to implement a clear definition of internal processes, transparent control systems and information flows. Areas such as procurement, financial management and contractual arrangements with third parties are particularly sensitive and may create a negative perception of the company. Transparency in the application of the Colterm’s ethics code – approved in 2017 – and the integrity plan in the implementation of the National Anticorruption Strategy for 2016-202029 will be relevant tools for improving internal business standards. In addition, defining a stakeholder engagement plan would help Colterm articulate its relations with different stakeholders in a more structured and professional manner, while also strengthening communication with the main stakeholders. Disclosure and transparency While Colterm’s audited financial and other relevant information – GSM decisions, Board decisions, Board activity reports – are published in its website, this information needs to be updated in a timely manner (e.g., investments and plans for the DH system have not been updated since 2016). The company should also publish annual activity reports indicating the evolution of main performance metrics and progress in the deployment of planned strategies, plans and activities. Moreover, information relevant to the users on service disruptions, planned maintenance works and service events may be facilitated through relevant communication channels. Finally, good practice also includes publishing information on the remuneration of Board members and high-level executives. 29 See https://ec.europa.eu/antifraud-knowledge-centre/library-good-practices-and-case-studies/good- practices/national-anti-corruption-strategy_en. 93 To manage information flows and incorporate them into the company’s overall strategy, a communications strategy should be designed and implemented. Responsibilities of the Board Board members and managers must demonstrate integrity, accountability, and competence. The Board’s responsibilities need to be clearly and transparently defined, and governing bodies will not be part of operational decisions. In addition to deciding on strategic topics, the Board will define strategic planning, long-term objectives, the incentive scheme (including remuneration of high-level executives), and the performance-monitoring framework. The Board will also supervise the operational and financial performance of the firm and the management team in achieving the goals defined in the strategic plan and following specific performance indicators. 94 Section V: Recommendations and roadmap A. Final recommendations The analysis confirmed that there are several valid technological options to consider – both at the demand and supply sides- which would increase significantly the quality and efficiency of heating service provisions in Timisoara. Independently of the solutions chosen, there is a key advantage to moving towards diversification of fuel sources, in particular more renewable energy-based sources of heating and implementing an EE program: strengthening energy security. Such solutions would reduce the City’s exposure to volatility and uncertainty of fuel supplies and prices, which have aggravated the crisis of the DH system in the past two years. Rising gas and electricity prices affect vulnerable households the most, as these spend a major part of their incomes on energy expenditures, reducing available income for other expenses. In addition, high energy costs have a ripple effect throughout the economy, increasing costs of transport and industrial production. Reducing dependency on fossil fuels could therefore have broad benefits for Timisoara’s social and economic wellbeing. Step-by-step approach to options analysis On the demand side, the implementation of a package of EE measures for buildings, in line with the recommendations of the LTRS, is a win-win for the city, given available public/EU funding for such investments, and the financial profitability of such investments. The next steps for the municipality will be to establish oversight capacity to carry out the proposed renovation program and select the most suitable financing scheme, among the schemes presented in the report. On the supply side, the analysis of heat supply has provided useful inputs, although further analysis is recommended with a full set of operational data at the substation level and a detailed heating system model. This would allow a more reliable analysis of connection and supply density. As the current analysis confirmed, the losses and cost of supply can be reduced with increased connection density of prioritized sections of the network. The analysis shows that certain areas with similar supply density show significantly different loss ranges. The densest supply sections (and substations with the highest demand) should be benchmarked based on more detailed data collection. With this approach, it is possible to identify weak points in terms of the location of heat generation (when decentralized alternatives are analyzed). Information about consumer density can be further utilized to optimize the network structure, especially in the early stages of network upgrade planning. The results of the current analysis indicate that further optimization is possible by optimizing the pipe diameters. A more detailed collection of data and analysis is recommended to evaluate the network pipe diameters and heat distribution capacities. The specific pressure drops should be further analyzed as they can serve as a parameter for assessing the network dimensioning. Further analysis on the demand side is recommended to identify the potential for optimizing the operation regime of the network, including supply and return temperatures The comparison of LCOH between existing and alternative technologies suggests that alternative technological options should be further investigated. These include sustainable energy solutions for the city, such as solar, biomass and geothermal heating technologies. A modern heating scheme will tap into local resources, limiting dependency on fuels and exposure to their price volatility. Both geothermal and solar heating are promising technologies with the potential to reduce the amount of fuel required in the heating units and therefore related operating costs. All technological solutions will need to undergo thorough Environmental and Social Impact Assessments. The system’s resilience will be one of the key 95 design factors to consider. A well-diversified and -balanced matrix of energy sources to produce heating will reduce the city’s exposure to fuel scarcity and price shocks resulting from local and global energy crises, and thus the use of local resources should be maximized and prioritized to the extent that it makes economic sense to do so. The approach highlighted in the previous section is meant to serve as a guide to carry out the decision- making process for selection of alternative options for heating provision in Timisoara. PT-level comparison of existing situation with the proposed technological options could result in a strategy to (partially or totally) substitute centralized heating with cluster solutions for those clients/neighborhoods where the amount of heat demanded, number of users served or amount of losses would not justify the provision of heat from a central unit. However, further analysis, both in terms of demand and analysis of options in the local context, are necessary. Such analysis and data collection will inform the strategic plan for district heating and energy efficiency as well as the definition of a strategic roadmap of critical actions underpinning the strategy– including the timing required for the technological shift, the establishment of long-term objectives and shorter-term targets, as well as potential financial resources and mechanisms. A key aspect of said strategy will be for the City to decide on the institutional arrangement governing the provision of heating services in the future. Preparation of a heating strategy The most immediate step is for the city to launch the preparation of the sustainable heating strategy, given the current constraints on data availability and lack of trust of stakeholders, may follow the set of steps proposed below. This also suggests several reforms of the current governance structure, indicating the areas where additional capacity is needed, functions should be set up, and relationships between departments should be clarified. Recent approaches to DH have focused on modernizing DH as part of a coherent and innovative vision for the decarbonized economic development of the city – underpinning a “circular economy”. The approach consists in optimizing the DH system by implementing a set of technical solutions that are well-proven and possibly locally sourced. These might involve rehabilitating aged networks, carrying out EE investments, or taking advantage of synergies between various economic sectors at the municipal level and thereby stimulating local employment. In Denmark, for example, local and national authorities have been particularly successful at developing DH – more than 60 percent of residential heat demand is served by DH – taking advantage of renewable energy sources, in particular solar energy, to develop competitive and sustainable systems. Despite relatively low solar radiation levels, the country has been at the forefront of district solar heating, with 1 GW of total solar thermal capacity in DH as of 2019. Other countries (such as Germany and Sweden) have focused on actively using waste heat, building links between energy, water, and waste management (including industrial waste). Such approaches require local governments with strong planning capacity, supported by conducive policy and tariff frameworks and strong technical skills. The following steps outline the main elements for the preparation and launching of the strategy. Step 1: Set up DH and EE technical offices The Municipality should set build up the capacity to define and implement its DH and EE strategy. To that effect, it should establish technical offices in charge of project management and development for District 96 Heating and Energy Efficiency. Specifically, on the basis of Timisoara’s organization chart, the teams should be multi-disciplinary and formed of staff from the current city hall departments of: strategic planning; “project incubators”; legal; procurement; budget; technical (networks, energy efficiency in buildings, investments); participative governance; and urban management. It should be placed under the coordination of the deputy mayor. The leadership of the teams, accountable directly to the deputy mayor and the public administrator, should be from the strategic planning department. Responsibilities would include, among others: • Preparation of requests for financing • Following up projects • Support to homeowners’ associations to prepare projects and procure works • Preparation of projects in the public domain Step 2: Launch DH strategy This step will focus on outlining the broad objectives of the strategy: what types of goals does the municipality want to achieve? These may include a certain level of emissions, a renewables target, or access to heat for various types of consumers (including poor and municipally owned buildings), as shown in the examples of various cities enumerated above. Even if the achievable targets by Timisoara by 2030 are initially unknown, there are some starting points. One may link the municipal goals for decarbonization, renewables and access to national targets (e.g. NECP), in which case the objectives may be defined in terms of what contributions could be reported in Timisoara towards the achievement of the national goals. An even better starting point (considering that national strategies and plans are not yet consistent with the latest EU policy and are likely to be revised in 2023) would be to use directly the targets from RepowerEU: 13% energy efficiency, 40% renewables, solar panels on each new public or private building by 2030. The proposal should mention clearly that the targets are indicative and would be refined after more in-depth analysis. An action plan should be included to show which steps the Municipality intends to follow in order to finalize and launch the strategy. The starting point of the draft strategy can be the current report. The strategy itself does not have to go into very specific projects and would also be built gradually based on the data collection. The targets will be gradually refined based on the most reasonable assessments, as more data and inputs from potential suppliers and consumers of energy comes in (from the steps highlighted below). The city hall should communicate broad project ideas to the stakeholders contributing information and data for the “energy atlas” (step 5) and collect project proposals from stakeholders. As mentioned above, all such information, contents of discussions and suggestions from stakeholders must be public, to avoid the risk of bias or the public’s misperception of special or vested interests. Very importantly, the selection of key indicators and RepowerEU targets can itself be used as a powerful advocacy tool. By publicizing the goals of the municipality and conducting a consistent public information campaign, the city hall can create public momentum to put pressure on other tiers of government. For example, it can build the trust of local stakeholders in the intentions of the municipality to reform its heating sector and build up public-opinion pressure to clarify the institutional setup of the DH in Timisoara. The broad objectives of the strategy (in the initially general terms) should be publicly assumed 97 by a deputy mayor (political leadership), the public administrator and the head of the strategic planning department (technical/civil servant). Step 3: Energy efficiency program In parallel with Step 2, the Municipality could launch the EE program for renovation of Multi-Apartment Buildings (MABs) and public buildings, building-up on the recommendations made in the report. This program can be launched independently from the identification of relevant technological solutions. The Municipality would finalize the design of the program, defining the institutional and financing arrangements and the schedule of renovations, identify possible sources of financing and then launch the program. Step 4: Data collection and analysis The data collection and analysis are instrumental for the development of detailed technical and financial models and analysis is key to inform the preparation of the strategy. The municipal heating strategy must be analytically founded and supported by strong financial and technological arguments. The different alternatives revised should be presented, discussed and the selection should be well argued. The team in charge of the data collection must aggregate data which is scattered across various departments in the city hall with little centralization, allowing the city hall also to have an overall view in one place of all data that is already available. The membership of the team (cross-departmental) will allow for the aggregation. The completion of the process will feed into an energy mapping exercise for the city. A training should take place for a group of experts under the DH office (which could be a “data collection unit”) to present the steps for data collection and the energy mapping exercise. Substantive data collection will first take place internally, focusing on demand side profiling/clustering, and heating demand. The team would take stock of the data currently available and identify gaps. Existing reports and operational data from SCADA, as well as data on heating demand should be used to carry out an exhaustive analysis of current heat demand in the city. These should be inputted into a numerical model for DH. This step would also provide the team with the opportunity to identify key internal bottlenecks in the process of data collection and recommend improvements in the data collection process, with clear responsibilities for units to provide needed data to the DH office in a regular manner. The technical office will then make in-depth assessments of potential technological supply options to compare them with the analysis for PTs and derive potential supply options at the three levels of provision as identified in this report. This analysis should also help accurately assess the actual and future cost of heating supply and allow the Municipality to launch a tariff review. In parallel, the office should review options to ensure that the most vulnerable households will receive affordable access to heating services. The data collected should help the technical offices compare data with preliminary technological options identified and identify opportunities for shifting technologies in plants and groups of/or individual PTs. Step 5. Energy mapping In parallel with the data collection process in Step 4, efforts should be made to involve external stakeholders to get a more exhaustive understanding of potential future heat demand in the city. While this is not on the critical path of reforming DH services in Timisoara, such broad stakeholders ’engagement process is in line with best practices and will strengthen, in the long run, the decision made by the 98 Municipality. Indeed, this engagement is important not only for sourcing relevant inputs for the preparation of a strategy for sustainable heating in Timisoara, but also for starting to build trust with various stakeholders, which is currently rather low given the difficulties experienced by the DH system in Timisoara in recent years and the slow process of the programs to improve energy efficiency in buildings. It links the regulator/planner function of the city hall and the advocate role for sustainable heating in Timisoara, including at national level: if the exercise becomes very visible in itself, it will raise awareness and put some public pressure on other tiers of government to adjust their strategies to EU plans such as the Repower EU and Renovation Wave. This “external” data collection process could involve the following activities: • Liaise with other municipalities that are following good practices in Romania in heating and local development (e.g. Oradea) and municipalities that are seriously embarking on ambitious local smart development plans (e.g. Alba Iulia, Brasov). Liaise with municipalities from other countries within the Covenant of Mayors to share experiences with the development of sustainable energy/heating strategies. These connections and the access to various experiences and practices are essential to help with the next tasks below. • Identify stakeholders. These might include consumer or household associations, businesses that have the potential to produce heat including waste heat, suppliers of various materials for DH and building renovation, various departments in the city hall dealing with DH and energy efficiency in buildings – but also national-level agencies, such as the mineral resources agency ANRM which has information on underground resources such as geothermal, etc. • Organize meetings and discussions with stakeholders. These range from consumers to various businesses which may have heat sources (including waste heat) or would be interested to invest in heat/energy in Timisoara and to researchers which may have more detailed data than is publicly available on renewables sources at local level. • Prepare data collection forms with a view to obtaining various sets of data on specific issues from various stakeholders. The preparation of such forms – which involves knowing what type of information is relevant for a successful sustainable heating plan – could follow examples from other countries, using the Covenant of Mayors network. • Prepare a friendly, visual platform (e.g. maps) for releasing the data to the public. The data collection exercise will also act a major communication campaign for building the trust of stakeholders that the municipality will need in order to develop and implement a sustainable heating/energy plan. • Provide public feedback to all stakeholders who contribute information, suggestions or project proposals. • Publish all data as it becomes available both in useable format (e.g. excel files) as open data and processed as maps. Very importantly, when published, such data can then be challenged by outside stakeholders if they are incorrect or incomplete. This will be done in a constructive manner if the process is perceived by external stakeholders as being undertaken with a clear intention of finding a solution in the general benefit of the 99 city. Using the data collection exercise, the city hall should start a proactive information campaign asking stakeholders to contribute relevant information, which includes various forms of data collection, from individual interviews (e.g. supermarkets can be interviewed to understand how much waste heat they could produce etc.) to questionnaires (data collection forms) and town-hall debates. The communication campaign can be supported by the department for communication, but under strict monitoring and reporting to the head of the task force (strategic planning), to ensure the coherence of the whole exercise as both a planning tool and stakeholder outreach. Such an approach would also allow consumers to contribute information about heat consumption and needs, including consumers not connected to DH and on which there is virtually no information at the city hall, allowing the city hall to think in broader terms about the strategy and future of the heating/energy. To summarize, the exercise will help have a continuous reality check from outside stakeholders on data available in the city hall, contribute missing data, while also building trust among the public that the city hall has a clear intention to prepare and implement a sustainable energy/heating and pressuring other institutions such as the national/county levels to do their part. Most municipalities that have a clear heating strategy (e.g. Amsterdam, Warsaw, Zagreb, Vienna etc.) have similar mechanisms for collecting and publishing relevant data, though typically local governments in other countries have better statistics and internal capacity to collect data than in Romania. In Timisoara the process would go to a larger extent than in other countries in both ways - publishing data available in various departments of the local administration while at the same time “crowd-sourcing” data that may exist at various local stakeholders and not at the city hall – for example, potential alternative sources of heat/energy that could be integrated in a city-wide solution and information on demand that is not in the centralized system. Typical data that is published in various cities concerning the municipal plans for energy include: • heat and electricity production • network operation data • existing and planned energy projects • consumption by types and size of consumers • building stock data • social indicators (relevant, for example, to identify energy poverty) • potential for energy efficiency and renewable sources • opportunities for heat storage, waste to energy, sewage heat recovery etc. As explained above, ideally such data must be available in raw form (open government data) and should also be visualized on maps. For example, Amsterdam’s energy atlas mentioned above has 90 maps, half of which are about the current situation of heat/energy provision, distribution and consumption, the other half about potential sources and plans. Crucially, such maps and data can be published early in the process, even if information is initially fragmentary (given the limited data available in the city hall in general); it can then be completed gradually. For example, it can initially include the data on the demand analysis in this report and then be refined based on additional information that becomes available from 100 the DH or consumers themselves. The “maps” and sets of data would thus be interactive and dynamic; if the data is updated and improved consistently, this would also keep public interest alive and suggest to all stakeholders that the city hall has indeed embarked on a serious plan to develop a solution for sustainable heating and energy efficiency in the municipality. The mapping will allow the technical office to refine the analysis of demand carried out including and assessing the data from external sources into the numerical model. Step 6. Detailed strategy This step consists in consolidating analysis and data from the preceding steps in order to detail and refine the DH strategy. Design and launch pilot projects Two or three small areas – PTs or small cluster of PTs – should be selected where the current service provision of heating is poor. The selection should start from the initial analysis in the current report; adding information from DH; and targeting stakeholders in the area with interviews, meetings and questionnaires. The targeted data collection should also focus on types of data that are collected in other departments of the city hall (e.g. plans for building renovation, information about the building stock etc.) and information that is not yet available in the city hall, such as non-DH demand and prospects, available renewables sources, available infrastructure on gas, electricity, geothermal; types of businesses in the area, e.g. if there are potential heat sources such as waste heat or sewage; potential for demand optimization based on energy efficiency measures/insulation of buildings; potential investors in new heat sources, etc. The entire data set should be placed in the public domain (open data and maps) and a call for solutions should be organized: the selection criteria should be in line with the general targets in point 1 (the least-carbon solution providing X amount of heat/energy to cover prospective demand). The alternative solutions should be assessed based on the degree to which they contribute to the targets and meet local constraints (e.g. environment - air quality, availability of space to install equipment etc.), as well as their overall cost-benefit; then the pilot should be implemented, keeping local stakeholders engaged throughout the process. The pilots themselves will be quite small, targeting areas where the DH already has difficulties in providing a heating solution, and would not pose major resource issues for the local budget; but they will be crucial in building trust from the public and in providing more data to clearly formulate such alternatives. Project ideas may include also new types of services, ranging from cooling to energy management services that could be provided localized. If the pilots meet core objectives of installing renewables, enhancing energy efficiency and reducing emissions, small-scale funding could be made available from EU funds or smaller, more flexible donors such as Swiss grants. Define institutional restructuring options Depending on the results, economic viability and availability of EU funds/grants, several options for institutional restructuring may be relevant: • Construction contract for multiple projects in the city (assets become the property of the city hall administered by the municipal DH company). 101 • Concession of heating solution to one or more private contractors (e.g. one or several heat producers to invest in generation capacity in several areas of the city). These may have the ownership of the assets, operate the capacities, then transfer the assets to the municipality at the end of the concession. This would require building a strong regulatory capacity within the town hall, contractual terms that would adequately split responsibilities and risks between the municipality and the contractor. • Concession of sections of or the entire DH system to a municipal or private operator. This may be the case if the needs emerging from the analysis would require an overhaul reform of the heating solution in the city. Such a solution may comprise very many decentralized heat-provision solutions, while the decentralized areas may still need to remain interconnected in a broader DH network to ensure contingency (e.g. if the supply of heat is best done using a local source but a backup source should also be available in case of an interruption of the local source). It should be noted that in other countries where DH systems are currently being built, the municipality may find it relevant to interconnect existing decentralized areas in a broader network precisely for such contingency plan. Timisoara, which is starting from a centralized system but where local solutions may accelerate the integration of renewables and improvements of efficiency, may reconsider the existing large transport network in a manner that would continue to provide only such backup (e.g. pipes may need to be downsized during modernization, but following the current routes). Governance arrangements, as outlined in the previous section and in line with best practices, should be defined as part of this review, and will be implemented by the Management of the DH company(ies). Finalize and disseminate the strategy The definition of the institutional model and the finalization of the analysis of supply options should allow the municipality to finalize and disseminate the strategy. Monitoring and feedback arrangements should be established. This is not a separate activity, but rather a continuous adaptation of the strategy based on the data collected via the energy map/atlas (during implementation of pilot projects) which reveals costs and benefits in case of a scale-up. There should be a calendar to review the implementation of the strategy, e.g. yearly, to indicate to the stakeholders the progress, reasons for changing previous plans or projects, and corrective measures in case of implementation delays. 7. Results of pilots and scale up Based on the experience of the pilots, additional data should be collected in a similar manner for the other PTs that are currently problematic for the DH, also focusing on the key constraints illustrated above. The city hall should aggregate the data and feed into the energy atlas/maps, then prepare the draft plans in continuous engagement with local stakeholders. The information thus collected should feed into the draft strategy and contribute to refining the overall objectives of the strategy, providing clear inputs for the strategy; concretely, the aggregation of all renewables installed in decentralized areas will add up to the final figure for renewable objectives, and the same would happen with the energy efficiency or emissions. The municipality then needs to add up the impact of the decentralized options to identify the remaining capacity needs for the centralized DH (existing CHPs and the existing large transport pipelines interconnecting various areas of the city). If in the process of aggregation, the same set of solutions emerge, e.g. a similar set of energy efficiency measures for buildings or a similar installation of equipment 102 for heat provision, these could be put together in broader packages, and the municipality’s team can prepare a bigger TORs to organize a tender in order to select a contractor to build the solution. Several solutions would likely emerge that would support the city hall’s efforts to achieve the same overarching objectives identified in step 2. These would need a proper assessment and comparison, and the city hall should present the process of analysis and selection among the options analyzed. The document can then be adopted as a strategy. 103 B. Roadmap The following table summarizes the key actions, timeline and responsibilities for the launching and implementation of the heating strategy: 104 105 106 Annex A. Overview of Colterm’s current financial situation Due to the absence of a cost recovery tariff, the disputed subsidy amount from the Municipality of Timisoara, high network losses, the sharp increase of the gas price in 2021, and unpaid carbon certificates, Colterm’s financial situation has been in a dismal condition for several years, accumulating significant arrears and liabilities. The company finds itself trapped in a vicious circle of lack of rehabilitation and maintenance of an aging network, leading to high (and increasing) technical losses. These averaged 20 percent in 2007-12, 30 percent in 2013-17, and 36 percent in 2018-2030, which has undermined the company's financial performance and its ability to operate the DH system adequately. In this context, Colterm became insolvent in October 2021 and the company’s previous main gas supplier decided to cut off its gas supply due to arrears and a stalemate in commercial negotiations. As a result, the company needs to find a new supplier to service its operations during the winter period. Colterm’s operational performance Table A-1. Colterm simplified income statement Simplified Income Statement In thousands of lei Op Yr 2018 Op Yr 2019 Op Yr 2020 Operating income 197,259 232,111 270,468 • Production sold 110,258 133,740 146,183 • Subsidies for production sold 42,959 60,374 66,439 • Other 44,042 37,997 57,846 Operating costs (240,758) (270,739) (284,483) • Materials (fuels, energy, water etc.) (122,987) (140,723) (128,883) • Staff (44,190) (46,171) (48,485) • Other, e.g. services, revaluations (73,581) (83,845) (107,115) w/o depreciation (9,807) 10,836 (11,572) Operating result (43,499) (38,628) (14,015) Net financial gain/loss (496) (471) (3,277) Net profit/loss (43,995) (39,099) (17,292) Source: Colterm financial data. Note: the financial statements include all operations of Colterm, including unrelated to DH. DH represents 83 percent of the turnover of Colterm. 30 Based on the last estimations, technical loss for FY2019 on the primary and secondary networks are respectively of 20.19% and 20.12% representing a total loss of 36.25%. 107 Colterm’s total operating income (which already includes municipal subsidies – the tariff subsidy for households and the amount budgeted by Colterm as network losses for the year) does not cover its operating costs. Operating incomes covered respectively 82 percent, 86 percent and 95 percent of total costs from 2018 to 2020. The revenue and cost coverage ratio were even lower for the period from October 2021 to September 2022 at 66 percent, indicating a worsening financial situation for the company. This is because not all losses from the DH provision are recognized in tariffs paid by consumers or by subsidies to cover the gap. Also, there is a time difference between when the company records network losses and when the municipality approves and pays for them (e.g. in December 2020, the municipality paid a last installment on such losses from 2018 and 2019). The result is that Colterm defaults on payments to suppliers (such as gas or coal) or to the state budget and does not have sufficient cash to pay for the CO2 certificates. For example, in 2020, Colterm had overdue payments of almost lei 190 million, which does not include the CO2 emissions. Of this, lei 119 million consists of overdue payments to suppliers (of which lei 86 million has been overdue for more than one year); lei 55 million in debts to the state budget for employees’ social contributions (lei 40 million for social security, lei 14 million health contributions); and lei 14 million for other local and central budgets. Revenues. Heat supply represents approximately 80 percent of total revenues (18 percent is revenue from non-core activities and 2 percent is from electricity supply). On heat production, the company has three main client categories: residential clients (which represent 71 percent of revenues from sales, without considering the tariff subsidy, recorded separately), state and public institutions (25 percent), and companies (4 percent). Operating costs. Based on a typical operation year (Op Yr 2019) before the sharp increase in the price of natural gas, the operating cost shows the following structure: Table A-2. Colterm: costs for operational year 2019 Cost Opex (in lei) % of total Variable costs 116,790,178 39.1 Gas 90,161,999 30.2 Coal 24,095,538 8.1 Electricity 2,532,642 0.8 Fixed costs 64,233,856 21.5 Material & other expenses 16,849,189 5.6 Salaries & other advantages 20,599,810 6.9 Depreciation 6,536,604 2.2 Royalty 283,358 0.1 Carbon tax* 19,964,895 6.7 Transmission and distribution cost 117,308,747 39.3 T&D variable part 95,693,357 32.1 108 T&D fixed part 21,615,390 7.2 Source: ISPE strategy study. * CO2 tax appears as a fixed cost, though it should be recorded as variable. Figure A-1. Colterm cost breakdowns Source: Data on costs of heating from ISPE strategy report 2019 Variable generation costs and total T&D costs are the main operating costs, with each representing 39 percent of total operation costs. Variable costs are mainly driven by the purchase of gas (77 percent of total variable cost), followed by the purchase of coal and electricity for 21 percent and 2 percent, respectively. Gas purchase is the main driver of the company’s operational costs; in 2019 it represented around 80 percent of the variable costs and a third of the total operational cost. Due to its cash situation, Colterm has had to make advanced payment for its gas purchases for the last three years. The price paid to EON included a day-ahead price, a margin and transport and distribution cost – which is why Colterm intends for the future at least to reduce the distribution cost of gas by connecting its main plants directly to the gas transport network. Due to Colterm’s cumulative arrears and inability to pay EON, the supplier decided in mid-October 2021 to cut off its supply. Colterm entered into negotiations with Petrom and other smaller gas suppliers for a contract based on a one-week gas upfront payment, and during the current season it will use more coal from various suppliers, as coal is cheaper. An additional problem from this approach is that increased coal consumption would lead to higher costs because CO2 emissions would have to be paid in 2022, meaning today’s current cash flow issues are rolled forward. The recent sharp increase in gas prices has not been factored into the end-user price, which so far remains the same as in 2019. In November 2021 the central government provided a bailout to all municipalities with gas-fired DH, and Timisoara obtained lei 53.8 million (€11 million). During the current 2021/2022 109 heating season, Colterm is expecting a sharp increase in costs, mainly due to the increase in the price of fuels and the carbon tax. The fuel cost observed in 2019 was lei 117 million, whereas the expected cost for the October 2021 to September 2022 period is lei 351 million, an increase of 200 percent – which also explains the company’s request to increase the tariff. The increase in gas prices was accompanied by an increase in the carbon tax above the threshold of 50 €/tCO2 eq. As a result, the CO2 certificates expense for the company is expected to continue to increase – from just lei 20 million in 2019 to lei 74 million for the period from October 2021 to September 2022 – and this without considering that Colterm will likely use more coal and have higher emissions than in previous seasons. It should be noted that in 2020 Colterm did not purchase the CO2 certificates and the Environment Fund Administration requested a fine of €21.6 million for the 200,000 certificates not purchased. The fine is currently suspended temporarily as it was challenged in court. The main observation is that CO2 certificates are a substantial liability for Colterm and decarbonizing DH is urgent to limit the expense and the risk of heavy fines for the inability to purchase certificates because of cash- flow constraints. Thus, in its accounting, Colterm pays by April of year N for the CO2 emissions in year N- 1. The expense is accounted for in year N-1 as a provision expense that is then settled in year N. For the CO2 emissions corresponding to 2020, because of cash flow issues, Colterm did not purchase the certificates by end-April 2021. The fine issued by the Environment Fund Administration, now challenged in court, is recorded as an expense for “amounts to be clarified”. Most likely, Colterm will have to pay in 2022: the CO2 emissions for 2020; the fine; and the higher CO2 emissions for the current season, when the DH uses more coal. Fixed costs comprise 56 percent of materials, including direct repairs, repairs performed by third parties, a small royalty for the use of the network, etc. Salaries and other employees’ advantages represent 34 percent of fixed costs. Balance Sheet and Equity Table A-3. Colterm’s simplified balance sheet Assets Op Yr 2018 Op Yr 2019 Op Yr 2020 Non-current assets 214,950 208,317 202,649 PP&E (fixed assets) 214,558 207,959 202,334 Of which: Land and constructions 130,756 126,763 120,990 Equipment 37,476 44,598 42,453 Furniture and smaller equipment 220 446 390 Work in progress 46,105 36,152 38,501 Non-current assets – concession 125 83 171 Current assets 242,291 240,876 300,631 Inventory 68,269 20,337 20,120 Receivable 163,819 216,117 279,432 Cash and cash equivalent 10,203 4,422 1,079 110 Total assets 457,241 449,193 503,280 Liabilities Capital 170,197 170,197 170,197 Long-term debts 50,950 29,095 577 Non-current liabilities 50,950 29,095 577 Payables 156,009 168,785 162,376 Short-term debt – loans 1,588 9,158 31,889 Liabilities for taxes 33,382 99,925 144644 Other 0 60 0 Short-term liabilities 190,979 277,929 338,910 Equity 96,885 52,680 35,388 Total liabilities and equity 338,814 359,704 374,875 Long-term assets The company’s long-term assets comprise buildings, furniture, equipment and works in the generation and networks undertaken during the concession contract with the company’s resources (usually repairs). When the concession contract expires, the works undertaken by the operator are added to the value of the network. The value of the network in the municipality’s accounts is not frequently revalued, though there is an inventory with all such assets and the latest valuation. Colterm’s long-term fixed assets exclude all the CHP plants and the transmission and distribution (T&D) network that are a property of the municipality and for which the company pays an annual royalty. This explains the relatively low amount recorded in the company’s long-term assets of approximately €40 million. The value of the royalty is not based on a market-based assessment. Working capital Table of aging receivables and payables from Timisoara is needed. Table A-4. Colterm: Aging receivables and payables Receivables One of the key challenges that the company is facing is the continuous surge of receivables which creates a steep increase in its short-term debts and a decrease in cash available for repairs. Receivables increased by 70 percent from 2018 to reach nearly 280 million lei as of end of 2020, which represents more than 12 months of operating income, considerably higher than the 3 months acceptable level. 111 Figure A-2. Receivables Source: financial statements of Colterm Receivables from clients and the state represents each 42 percent of the total. The significant share of receivables from the State is in part due to the accounting of technical losses and ensuing financial losses. For example, in 2020, Colterm “bills” the municipality for two types of losses – the actual losses on the network (lei 71.6 million) and financial losses representing penalties due to various suppliers because the municipality has not paid in time the subsidy in previous years (another lei 45 million). The reimbursement from municipality occurs with delays (e.g. in December 2021 some overdue amounts were paid for 2018- 2019-2020), which builds up financial induced losses. The municipality made efforts in the past year to catch up with overdue payments from 2-3 years ago. Payables. In term of payables, financial debt represents only 10 percent of total payables. Suppliers and debts to the state budget represent respectively 48 percent and 39 percent of total. The company’s debt to the state is lei 131 million and receivables from the state (mostly local budget, explained above) are lei 117 million. Colterm’s debt Colterm has no long-term financial debt (it cannot access loans under its current financial position). Its long-term outstanding debts balance is as follows: Figure A-3. Colterm: Long-term debts Source: Financial statements of Colterm. The company’s long-term debt has decreased from lei 51 million in 2018 to lei 29 million in 2019 to lei 0.5 million in 2020. This decrease does not indicate an improvement in the company’s balance sheet, as the reduction of long-term debt is a direct result of re-categorization as short-term debt in 2020. As a result, 112 short-term liability reached lei 300 million, while total company debt remained stable. The recategorization of debt was triggered when the company lost its privilege of payables rescheduling, concluded with the Directorate General Administration of Large Taxpayers (DGAMC) Bucharest, of all outstanding debts to the state budget in July 2020, representing social contributions for social security budgets (pensions) and taxes due to the central budget (e.g. VAT). The remaining (low) amount of long-term debts in the company’s balance sheet are mainly leasing contracts. Equity position Due to its accumulated deficits, the company shows a weak equity position of RON 35 million as of the end of 2020. Its debt-to-equity ratio (total liabilities/equity) as of the end of 2020 was 13.2x and indicates the inability of the equity to cover all outstanding debts in the event of a business downturn. The equity- to-total-liability ratio confirms the same: the ratio stands at 7 percent, considerably below the acceptable value of 30 percent and the more recommended value of 40 percent. 113 Annex B. Overview of residential EE programs and instruments in the region This section summarizes relevant EE programs in the region. PadovaFIT is an initiative for the energy refurbishment of multi-property residential buildings for the City of Padova, Italy (210,000 inhabitants). Within this project, the Municipality of Padova has launched a Financing Investment Tool for multi-property residential buildings. The work in the subscribed buildings is performed by an energy service company (ESCO) in partnership with an engineering company. The focus has been on buildings built in the 1960s and 1970s (mainly Class G condominiums). The ESCO manages integrated energy services that offer contracts with guaranteed performances, whose fees are directly connected to the achieved energy savings (energy performance contracting – EPC). Building on this experience, PADOVAFIT now aims to create and pilot a dedicated One-Stop-Shop in Padova, expand the business model to Timisoara – launching and piloting a One-Stop-Shop as well – and support the Bulgarian Energy Agency of Plovdiv31. Funding for the program is provided by participating commercial banks and an equity fund. Apartment owners have to repay an amount equal to 95 percent of estimated energy savings; they keep about 5 percent as immediate savings on their energy bills (shared savings). Thermo-modernization Fund in Poland. The Thermo-modernization Fund, established by the Polish government in 1999, aims at refurbishing the existing building stock in both public and residential buildings. Sponsored by the state-owned Bank of National Economy (BGK) and the Ministry of Finance and Ministry of Infrastructure, the Fund is a nationwide initiative targeting housing cooperatives, housing communities, private individuals and local governments. Eligible investments must meet certain technical and financial criteria, which are verified by an energy audit and financial analysis. The energy savings must amount to at least 25 percent for a comprehensive building refurbishment. In the case of a modernization of indoor heating or local heating systems as well as DH systems, this figure must be at least 10 percent; in the case of refurbishment of buildings constructed before 1961, 10 percent. Individual projects are usually financed by a loan amount of up to 80 percent of the total project costs. Provided that the loan (plus interest) can be repaid within 10 years (the maximum term of the loan), the BGK can offer a grant bonus of up to 20 percent of the amount of credit taken. The delivery mechanism consists of the following steps: 1) Application for thermo-renovation grant, together with loan application with produced energy audit: Thermal Retrofit Investors (housing cooperatives) submits this to the Participating Bank, which evaluates eligibility of the renovation loan. 2) Application for thermo-renovation grant: The Participating Bank submits this to the BKG (a Polish national development bank). 3) The BKG checks the energy audit and eligibility of the proposed investment measures and approves the grant. 31 EU event material, “Second Roundtable on Finance for Energy Efficiency in Romania,” June 6, 2019, Bucharest. 114 4) The Participating Bank disburses the loan for thermo-modernization works to the contractors for completed works. 5) Thermal Retrofit Investors (housing cooperatives) confirms completion of the construction works and provides an ex-post audit to the BKF via Participating Bank. 6) The BKG checks the results and transfers up to 20 percent grant of the amount of credit taken to the Participating Bank. Multi-apartment thermo-modernization program in Lithuania. The “Multi-apartment Buildings Renovation Program” was launched in 2009 with the support of the Joint European Support for Sustainable Investment in City Areas (JESSICA) Holding Fund. It supports multi-apartment thermo- modernization projects with up to a 30 percent government subsidy (provided after the project is completed and energy performance class “C” is achieved) and financial instruments (soft loans) with a 3 percent (for the first 5 years) fixed interest rate from the Fund of Funds financial instrument. The financing model involves loans provided not only to apartment owners, but also to municipal program administrators acting on behalf and for the benefit of apartment owners. Program administrators act as intermediaries and perform routine tasks such as preparing renovation applications, facilitating renovation decision-making during apartment owners’ general meetings, procuring contractors, monitoring implementation and payments, and collecting repayments from apartment owners (as utility payments to the designated special account for loan repayment to commercial band/financing institutions). These changes have accelerated the modernization process in Lithuania. Subsidy procedures for low-income persons have also been revised to facilitate the renovation decision- making process among apartment owners. Low-income persons who are entitled to receive heating subsidy are not required to repay loans. However, if the low-income persons refuse to vote in favor of thermo-modernization, they can lose their existing heating subsidies from the state. More than 3,000 buildings have already implemented thermo-modernization works and received program financing. Delivery mechanism in Slovakia — State Housing Development Fund. The State Housing Development Fund is oriented for individuals, households and associations of apartment owners and can be used in the form of non-repayable grants or favorable loans in order to improve the thermal insulation of residential buildings and apartments. Applications are received on an ongoing basis until all of the amount allocated in the annual budget is spent, but not later than 31 December of the respective year. Homeowners' associations must co-finance 20 percent of the eligible costs, as well as sign a declaration stating that the applicant is not bankrupt, has fulfilled obligations relating to the payment of social security contributions or the payment of taxes in accordance with the legal provisions of the country, and has fulfilled obligations relating to the payment of all loans or credits connected to the apartment building. The achieved energy saving is not monitored, but it must be demonstrated to represent at least a 20 percent reduction in energy consumption for heating in the project. Program receives funding from the EU and from national co-financing resources allocated to the Integrated Regional Operational Program, which is managed by the Ministry of Agriculture and Rural Development of the Slovak Republic. 115 Annex C. TRANSGAZ gas infrastructure projects relevant to Timisoara The project "Development on the Romanian territory of the National Natural Gas Transmission System on the Bulgaria–Romania–Hungary–Austria Corridor" seeks to expand the natural-gas transmission capacities of the interconnections between the Romanian natural gas transmission system and similar systems in Bulgaria and Hungary. More precisely, the project is building a new natural-gas transmission pipeline that will make the connection between the Podisor Technological Node and SMG Horia. In accordance with the provisions of List no. 4 PIC / 2019, the implementation phases of the Bulgaria– Romania–Hungary–Austria (BRUA) Project are as follows: • Development of transport capacity in Romania, from Podisor to Recas including a new pipeline, a new metering station and three new compressor stations in Podisor, Bibesti and Jupa – BRUA Phase I – 6.24.1 in List 4 PCI / 2019 – BRUA first stage – completed project; • Expansion of the transport capacity from Romania from Recas to Horia to Hungary up to 4.4 billion cubic meters/year and amplification of the compressor stations from Podisor, Bibesti and Jupa – BRUA Phase II – 6.24.4 – position 1 in List 4 PCI / 2019 BRUA second stage. Moreover, the BRUA Project was included on the priority list of the Central and South Eastern Europe Energy Connectivity (CESEC) working group, as follows: • Phase I of the BRUA Project was included on the list of priority projects. • Phase II of the BRUA Project was included on the list of conditional priority projects. Figure B-1. Major development project of the of the Bulgaria-Romania-Hungary-Austria corridor, Phase II 116 Source: Transgaz TYNDP Phase II consists in achieving the following objectives: • Recas – Horia pipeline 32” x 63 bar, length of approximately 50 km; • Amplification of the three compression stations (SC Podisor, SC Bibesti and SC Jupa) by mounting an additional compression unit in each station; • Amplification of the existing SMG Horia gas measuring station. The implementation of the BRUA Project (Phase II) seeks to establish a permanent two-way flow between interconnections with Bulgaria and Hungary, ensuring the following natural gas transmission capacities: transport capacity to Hungary of 4.4 billion cubic meters/year, respectively of 1.5 billion cubic meters/year to Bulgaria. Unlike BRUA Phase I, which is considered a security-of-supply (SoS) project, BRUA Phase II is considered a commercial project, and the Final Implementation Decision will be taken only if the project is commercially viable. The investment completion deadline is 2023, with a value of €74.5 million. To strengthen the degree of interconnectivity between natural gas transmission systems in EU Member States and to increase energy security in the region, a project to connect the National Natural Gas Transmission System in Romania with that in Serbia is also included. This involves the construction of a new natural gas transmission pipeline that will ensure the connection between the “BRUA” natural gas transmission pipeline and the Mokrin Technology Node in Serbia. In Romania, the pipeline will be connected to the BRUA Phase I pipeline (Petrovaselo locality, Timis county) and will have a length of 85.56 km (the border between Romania and Serbia-Comlosu Mare locality, Timis county). The project will consist of the following: • Construction of a new interconnection pipeline in the direction of Recas–Mokrin of approx. 97 km, of which approx. 85 km is in Romania and 12 km in Serbia, with the following characteristics: (a) pressure in the BRUA pipeline Recas area: 50-54 bar (PN BRUA – 63 bar), (b) diameter of the interconnection pipe: DN 600, (c) transport capacity: max. 1.6 billion Smc/year (183,000 Smc/h), both on the Romania-Serbia direction and on the Serbia-Romania direction. • Construction of a natural gas measuring station in Romania. • Completion deadline 2023; investment value €56.21 million. 117 Figure B-2. Interconnection of the national natural gas transmission system with Serbia in the direction of Recas-Mokrin Source: Transgaz TYNDP. If natural gas will be taken from Serbia to Romania, it can be directed for consumption in the Timisoara– Arad area, through the DN 600 Horia – Masloc – Recas pipeline (25 bar), at lower pressures than in the BRUA pipeline. Assuming that the transport capacities required for the exploitation of natural gas from the Black Sea on the central-western European markets exceed the transport potential of the BRUA Phase II corridor, TRANSGAZ has planned the development of the central corridor, which practically follows the route of some pipes in the current system, but which now operates at inadequate technical parameters for a main artery. Depending on the volumes of natural gas available on the Black Sea coast (which cannot be taken over by the BRUA Corridor), in the long run the development of the transport capacity on the Onesti–Coroi– Hateg–Nadlac corridor is envisaged. The development of this natural gas transmission corridor involves the following: • Rehabilitation of existing pipelines belonging to NTS; • Replacement of existing pipelines belonging to the NTS with new pipelines or construction of new pipelines installed in parallel with existing pipelines; • Development of four or five new compression stations with a total installed power of approx. 66- 82.5 MW; • Increase of natural gas transmission capacities to Hungary by 4.4 billion cubic meters/year. 118 Figure B-3. BRUA Development - Phase III Source: Transgaz TYNDP. TRANSGAZ has developed a pre-feasibility study on the development of this natural gas transmission corridor. To optimize and streamline both the implementation process and the possibilities of attracting non-reimbursable financing, the corridor has been divided into two projects. The realization of this corridor depends on the evolution of the capacity demand as well as on the results of exploration/exploitation of natural gas fields in the Black Sea and other on-shore perimeters. A final investment decision will be taken only when the additional capacity demand is confirmed by booking agreements and contracts. 119 Annex D. Colterm’s current plans for network modernization In the district heating system in Timisoara, in 2019, heat generated by various sources amounted to about 738,875 MWh/year, with losses totaling about 269,023 MWh/year (36.4 percent). Losses were split between heat losses in transport (149,100 MWh/year) and in distribution (119,923 MWh/year). Through the ongoing modernization of the heating networks, district heating losses could be reduced by 130,139 MWh/year to 138,884 MWh/year with the heat demand from sources dropping to 608,736 MWh/year. In this scenario, the share of losses would decrease to 22.8 percent. Detailed estimates are as follows: • The hot-water transport system in Timisoara recorded losses of 21 percent in 2019 (149,100 MWh/year), from the heat injected into the DH system from CT Center and CET Sud (710,000 MWh/year). Losses were caused by the poor technical condition of the pipes, but also by the oversized infrastructure compared with the heat demand. The modernization projects Colterm has undertaken with EU financing, which should be finalized by end-2023, would reduce the losses to about 71,000 MWh/year, a potential reduction of about 78,100 MWh/year. • Hot water distribution system from substations records losses of 21 percent (114 048 MWh/year) by the heat entered from substations (540 000 MWh/year). The modernization projects taking place under the EU-funded Large Infrastructure Operational Programme (LIOP) are intended to reduce the losses to 64,400 MWh/year. The loss-reduction potential is about 50,000 MWh/year. • The hot-water distribution system from boiler plants has recorded losses of 17.92 percent (5,875 MWh/year) by the heat entered in the distribution system from boiler plants (28,875 MWh/year). The modernization projects would reduce the losses to about 3,836 MWh/year. The loss- reduction potential is about 2,039 MWh/year. 120 Annex E. Approach to demand analysis: Input parameters and assumptions The analysis is based on the available data in all substations (thermal points - PTs) for the period 21-31 January 2022 and 21-31 July 2021. The recorded data was obtained for the times of 7 AM, 3 PM and 11 PM and contained the following information: • For thermal plants: external temperature, forward and return water temperatures and pressures, hot water flow; • For each substation: inlet and outlet water temperature and pressure, 8-hour period flow and daily flow. The following assumptions have been made in addition. From available data for July: it is determined which PTs are responsible for heating of domestic hot water (DHW), and what is the respective thermal output (in kW) as well as the average supply and return temperatures. • From available data for January: the extraction of the average thermal output per PT, and the average external temperature was possible. From those outputs, the heat output for DHW preparation is deducted, and the result is adapted to the design temperature of -15°C, after which the DHW portion is added again. • The pipeline losses in W/m were calculated using the appropriate method, considering the diameter, and piping type (classic, pre-insulated). • For each regarded PT, with the above-obtained output values, the annual delivered heat (MWh/year) is calculated. The assumption is made that the annual average peak load hours are 1800h –based on the experience from the comparable DH systems The length of the pipeline sections for each respective PT was determined based on the received information. Different properties of conventional and pre-insulated sections of the pipeline have been considered. The parameters considered were the length of the pipeline from respective thermal powerplant to the regarded PT. The findings were inserted into the ACAD/GIS file: • For each pipeline section, the loss calculation is performed using into account the thermal loss in kW, length of the section, and the calculated losses in W/m, per regarded pipe dimension and type; • The thermal loss is taken on the annual level, considering the continuous operation due to the DHW supply. • For each identified PT, the assessed annual losses in MWh are estimated; the assumptions for this calculation were considering the peak annual operating hours from similar DH systems Analysis and modelling 121 Based on the available information and by making the additional assumptions, the data and calculations were analyzed to obtain representative insight into the DH network parts, supply characteristics, physical values of the media on relevant inlet – outlet points and other relevant parameters. The following assumptions are made in the calculations: • The primary network was supplying substations (PTs) from the thermal plants (CT Centru, CT Sud), and is the focus for the analysis; • The secondary network is supplying customers from local PTs; • Two periods of heat supply were regarded, as the data was available for a limited time period; the summer period in late July 2021, and the winter period in late January 2022; • The supply of individual PTs from each thermal plant was considered as per the schedule provided by the client Based on the above, the following was extracted. • Thermal plant supply regime • Period of supply • Day and hour (three 8-hour periods per day) • All PTs (substations) For each 8-hour period that was received, the tabular information was prepared • for thermal plants: external temperature, forward and return water temperatures and pressures, hot water flow. • for each substation: inlet and outlet water temperature and pressure, 8-hour period flow and daily flow With this data, the preliminary calculations of the losses per section were performed (inlet and outlet temperatures, water flow and pipe diameter were considered). Indicative losses were then added to the GIS/dwg drawing. The adjusted map of the DH primary pipeline system is presented as an example in the figure below (part of the DH system). The blue lines mark the pre-insulated pipeline sections, and the pink lines are the conventionally insulated ones. For each regarded section of the primary DH pipeline, the losses are preliminarily expressed as the dissipation of heat power in kW thermal, for the regarded length of the line. 122 Figure 26. DH primary pipeline system A detail is shown as an example in the figure above. For each active substation (here PT 25, the annual delivered thermal energy to the final consumers (more precise, to the secondary network) is given, as well 123 as its calculated thermal output. For each regarded pipeline section, pre-insulated and conventional, the following characteristics are given: • d – length of the section • EG – annual thermal losses in the regarded section • Q – dissipation heat output (cause of the losses Finally, accounting for total aggregated system losses related to each substation was necessary. The total losses occurring in the primary transport network (from the thermal plants to the substations), were determined, and the corresponding share of losses to the individual substations was assigned. To consider the position where the losses in the system occur, the calculation is divided into two parts. The first part considers the heat losses in the network that are related to local substation branches, as previously described. In addition, the losses of the main network were added. The losses of the main network are calculated per section (grouped branches) of the network. The sections of the main primary network are determined by the position and extension relative to thermal plants Centru and Sud. For each section, the lengths, and losses of sub-sections, depending on the insulation state, are considered. The aggregated losses are distributed per sub-stations, depending on their position and on the delivered heat to consumers. The losses resulting from the main primary network are then added to the previously calculated losses at the substation level. The results of the calculations are used to generate the heat map (showing the heat supply and losses) of the network in order to help identify the areas of the network with low supply efficiency and increased cost of supply (resulting from network losses). Due to the unavailability of data and with respect to the assumptions made, the final calculations do not necessarily present the actual heat supplied to the consumers in the current operating conditions but are used as an approximation for the purpose of the analysis. The following table shows calculated losses and cost of supply for each substation. For substations marked in grey, calculation was not possible, or data was not available. 124 125 Annex F. Detailed financial analysis DH sector / Colterm in the BAU scenario A financial model of Colterm has been built to assess the robustness of the Municipality’s DH sector. The financial model depicts a 10Y projection of the SOE financials considering multiple inputs (described in the table below) to give a view on the “Business as Usual” (BAU) scenario. In this scenario, it is considered that no further investments are made to build new greener and cost-effective plants, no investments in upgrading the T&D system, and no investment in the improvement of the Energy Efficiency (EE) at the level of the Multi-Apartment Buildings (MABs) and the Public Buildings (PBs). Based on the output of the BAU scenario, the team has built further scenarios introducing the impact of renovations at MABs and PBs and of the progressive phasing out of coal and gas plants partially replaced by new greener plants. The BAU scenario relies on the projection of Colterm historical financial statements over 10 financial years. The projection relies on multiple hypothesis and inputs presented in the table below: MACRO FX: euro/Lei Flat project at 4.92 Consumer Price Index +5% in 2022, +3% in 2023, +2.5% in 2024 onwards REVENUES Heat tariff Unchanged Regulated tariff at 415.4 Lei/MWh – Households pay half tariff (Colterm receives the other half from Municipality as subsidy) Consumer’s repartition Households – 80% public institutions – 16% corporate companies – 4% Heat demand As per Colterm forecasts – supposing further disconnections OPEX Gas price (USD/mmbtu) 14.6 in 2021, 20 in 2022, 15 in 2023, 10 in 2024 onwards Coal price (USD/tonne) 150 in 2021-2022, 120 in 2023, 100 in 2024 onwards CO2 tax price (EAU per 55 in 2022, 45 in 2023, 40 in 2024 onwards tCO2 eq) T&D cost Fixed cost: flat 21.62 million Lei/year Variable cost: 203 Lei/MWh distributed 126 Total network (T&D) loss: flat 36.3% Repartition of heat Q1 47% consumption throughout the year (based on 2019 Q2 16% historical data) Q3 7% Q4 30% Royalty for assets use Flat 60,000 eur/year CAPEX No new investment - considered WORKING CAPITAL Receivables in days of Consumers: from 226 days perceived in 2020 to a flat 180 days in 2021 revenues onwards State related institutions: from 151 days perceived in 2020 to a flat 120 days in 2021 onwards Payables in days of OPEX To suppliers: from 208 days perceived in 2020 to a flat 200 days in 2021 onwards To State Budget: from 168 days perceived in 2020 to a flat 180 days in 2021 onwards Further operational32 inputs have been derived from perceived figures from the 2017-2019 historical data. Under all the below inputs reflecting the BAU, Colterm continues to be non-profitable, accumulating considerable levels of deficits that keep worsening due to the surge in fuels and carbon prices and to an aging production and T&D assets as depicted by the figures bellow summarizing the main finding from the projection of the SOE financials over the 10Y. Detailed financial statements are presented in the annex. 32 This includes volume of fuels consumed per MWh of heat produced for each plant, CO2 emission per plant, Cost of electricity per MWh produced for each plant, among others. 127 The profitability ratios (EBITDA, EBIT, and net profit margins) show continuous negative figures. The perceived improvement in 2020 (historical data – the projection starts from FY 2022) has been rapidly and considerably counter-balanced by the soar in the fuel (gas and coal) and carbon prices between 2021 and 2022. The projection of a decrease in these prices starting from 2024 after the peaks on the 2021-2023 period results to an improvement of the profitability ratios that remain in negative figures: in average (- 9.3%) for the EBITDA margin and (-12%) for the Net Profit margin for the 2024-2031 period. The rightmost figure gives a view on the high level of OPEX to be covered by Colterm. In addition to the variable costs driven by fuel price that represents a considerable burden on the DH equilibrium (approximating 40% of total opex in average), the T&D registers even higher chunk of the total opex (44% of Opex). The aging and oversized network results in extensive need in maintenance and repairs, and peaking unprecedent levels of technical losses (36%+). The accumulation of losses results in the deterioration of equity that goes below 0 as shown by the equity ratio figure below (calculated as equity to Long Term Assets). In addition to this long-term insolvability, the company would face serious short term liquidity issues as the current ratio (current assets to current liabilities) would follow a decreasing trend from 80% in 2018 to 7% in 2030, pointing to the high risk of distress or default. These low levels of current ratio (also referred to as working capital ratio) highlight the company’s inability to pay short-term obligations or those due within one year to satisfy its current debt and other payables. The projection of the financials in the business as usual case scenario shows that the ongoing unsustainable situation faced by the SOE (declared bankrupt as mentionned below in the report) is 128 intended to worsen due to the increase in fuel and carbon prices. The DH sector needs extensive investments in the production (plants) and T&D segments as well as an improvement in the technical and commercial efficiency. A clear strategy to tackle the rise of fuel prices needs to be assessed and implemented. Renovations and energy efficiency As stated before, Colterm faces unsustainable profitability and liquidity margins and ratios. Effectively, Colterm’s EBITDA shows continuous negative figures which means that Colterm makes a loss for every Gcal of heat distributed. It is considered in this section that, as per Romania LTRS analysis, respectively 80 percent and 85 percent of MABs and PBs useful areas would be renovated by 2040. The modeling conducted for this section considers that 60 percent of MABs and PBs useful areas renovated by 2031. The impact of the energy efficiency achieved through these renovations at the municipality level has been assessed based on the following assumptions: Based on the below and considering that households would bear full cost of renovation without any CAPEX subsidy and keep receiving 50% of subsidy on heat price (keeping current price paid by households at 208 Lei/MWh), the payback period would be of 33 years. Considering a subsidy contribution of 50% of total renovation cost by the Municipality and a subsidy on the heat price down from 50% to 20% decreases the payback period to 10 years. The base case scenario considered for the renovations relies on the 50% subsidy on heat prices for households in addition to 40% subsidy on the cost of renovation. The following figures show the sequencing of the investments, savings and recovery rate: As of end of year 2031, the cumulative investments to reach 60% of total MABs and PBs useful area would be recovered through energy savings at respectively at 33% and 39%. 129 As presented in the previous section, Colterm experiments a continuous negative EBITDA. This means that the company makes a loss for every Gcal of heat distributed. As a consequence, it is theoretically expected that total amount of losses diminishes if the quantity produced and distributed diminishes. The renovations and improvement of energy efficiency would hence improve Colterm financials as quantity distributed decreases. The following section tests the same by gauging the impact of the Energy Efficiency (EE) scenario described above on the SOE financials. Impact of EE on the SOE financials: The decrease in the heat consumption from future renovations has been implemented into the model to gauge its impact on the SOE financials over the 10Y projection period. It is important to note that the figures displayed above concern all household connected and disconnected from the DH network. Only savings on households connected (representing 43% of total households ’ savings) have been considered in this section in addition to all PBs (considered all connected to the DH network). The table above summarizes the results of the two scenarios in terms of revenues, Opex, EBITDA, and net profit. Most of operational savings would be made on the variable cost (purchase of gas, coal and associated carbon tax from heat production). The savings on the T&D part will be minimal and made on the variable chunk of this cost. As expected, the EE slightly improves the financials as EBITDA increases by an annual average of 9 million Lei (equivalent to € 1.8 million /year). Nevertheless, the situation remains unsustainable (EBITDA negative) for the district and the SOE as losses will keep accumulating even if in slightly lower figures. The improvement of the global situation of the DH system will need extensive investments in the production and T&D networks. The following section evaluates new investments in heat plants. New Investments – alternative projects Biomass / Waste combined heat and power (CHP) Investments in new greener plants for the DH have been assessed. 130 The alternative of a Biomass / Waste combined heat and power (CHP) plant with steam turbine generator in replacement of existing coal/gas plant in South and Central DH plants has been evaluated. A high-level financial analysis of the project has been run over 20Y based on the following inputs: Investment 25 € million Opex – Total 3.05 € million/year Heat produced 160,000 MWh Heat price 8.47 €c/kWh T&D losses - DH network 36.30% % WB estimated loan interest 5.31% % Romania sovereign yield 7.95% % Tenor 20 years Debt source and repayment profile Bond - bullet - repayment The Project IRR is calculated on the basis of a simplified cashflow statement built of the project. Energy sold considered is sized after taking into account a 36.3% loss through the T&D DH network. It is important to note here that the project can generate up to 40,000 kWh of electricity per year. For the project financing, two alternatives are considered: - Fully financed through IBRD debt: IBRD financing cost corresponds to 6 months-SOFR rate plus an IBRD premium of 1.89 percent (corresponding to pricing offered by IBRD to Group C countries to which Romania belongs for 20Y loans). Total loan interest is 5.31 percent, and the repayment is annual. - Financed with public resources: in this case the cost of financing corresponds to the sovereign yield curve of 7.95 percent and the repayment is a bullet repayment at the 20th year. The project is sustainable and shows good profitability ratios: Project Internal Return Rate is of 11.4% for the bond bullet repayment option and 10.5% in case of an IBRD loan repaid annually. The Project’s Levelized Cost of Energy (LCOE33) comes at 33.4 euros/MWh (equivalent to 3.34 euros cents per kWh). The project will show greater IRR and lower LCOE if the electricity produced is taken into account. Average yearly heat to be distributed (after technical losses) amounts to 102,000 MWh which represents around 25% of total yearly heat distributed (after technical losses) to end-users ’consumers. 33 The discount rate considered is the average of IBRD loan cost and sovereign yield bond (i.e. 6.63%) 131 The integration of this project into the DH system to offset production from existing plants would lead to a great impact on the DH financials. This is shown through the EBITDA and net profit/loss to Colterm depicted by the figures below34. Average annual EBITDA over the 10Y period is of (+3) millions Lei. Nevertheless, the company still makes continuous annual net loss but at lower figures: annual average loss would decrease from 42 millions Lei to 15.6 millions Lei, representing a decrease in losses of 63%. Further investments in cleaner and more sustainble plants to offset the production from existing plants and investments in improvement in the T&D network to lessen the technical losses will be needed to reach a sustainable situation. Gas engine-based CHPs delivering both heat and electricity A second alternative option has been evaluated: the DH plant South would count on several gas engine- based CHPs delivering both heat and electricity. A high-level financial analysis of the project has been run over 20Y based on the following inputs: Investment 25.2 € million Opex - Total excluding carbon tax 22.09 € million/year CO2 emissions 70,686.00 tonnes/year Estimated allowance 20,000.00 tonnes/year Carbon price 50.00 €/t Carbon tax - additional opex 2.53 € million/year Heat produced 160,000 MWh Heat price 8.47 €c/kWh Electricity produced 168,000 MWh Electricity price 15.00 €c/kWh T&D losses - electricity network 12.00% % T&D losses - DH network 36.30% % 34 EE + Alt 1 scenario corresponds to a scenario taking into account the renovations (Energy Efficiency) alongside the alternative project of the Biomass / Waste combined heat and power (CHP) 132 WB estimated loan interest 5.31% % Romania sovereign yield 7.95% % Tenor 20 Years Debt source and repayment WB estimated profile debt Capex for this second alternative is at the same level of that of the previous alternative presented (i.e. 25 million euros). Nevertheless, annual Opex is of 2235 million euros representing more than (7x) the first alternative’s Opex. This is due to the high utilization of gas (around 350,000 MWhNG/year). It is worth mentioning that this option would generate (4x) times more electricity than the previous one (168,000 MWe Vs. 40,000 Mwe). Considering heat as only output makes this project unsustainable. Hence, for this alternative and taking into account that the amount of electricity generated36 by this project is considerable, it has been included in the analysis. Project Internal Return Rate is of 13.2% and the Levelized Cost of Energy (combined for electricity and heat) comes at €82.1 /MWh (equivalent to 8.21 € cents per kWh). The integration of this project into the DH system to offset production from existing plants would lead to a great impact on the DH financials. This is shown through the EBITDA and net profit/loss to Colterm depicted by the figures below37. The impact is very comparable to the one of the previous alternative. Average annual EBITDA over the 10Y period is of (+3.3) millions Lei. Nevertheless, the company still makes continuous annual net loss but at lower figures: annual average annual loss would decrease from -42 millions Lei to -15.3 millions Lei, representing a decrease in losses of 63%. 35 Estimated based on a price gas of €63.1 /kWh. 36 Project makes greater income from the electricity due to, inter alia, the considerably lower T&D electricity network loss of 11.4% only. Source: https://www.enerdata.net/estore/energy-market/romania/ 37 EE + Alt 2 scenario corresponds to a scenario taking into account the renovations (Energy Efficiency) alongside the alternative project of Gas engine-based CHPs delivering both heat and electricity 133 Further investments in cleaner and more sustainable plants to offset the production from existing plants and investments in improvement in the T&D network to lessen the technical losses will be needed to reach a sustainable situation. 134 Annex – Simplified Colterm Income Statement projection – BAU scenario Annex – Simplified Colterm Balance Sheet projection – BAU scenario (1/2) Annex – Simplified Colterm Balance Sheet projection – BAU scenario (2/2) 136 Annex – Simplified Colterm Cashflow Statement projection – BAU scenario 137 Annex G. Timisoara DH strategy - Short-term measures There are three levels of measures that the Municipality could take immediately to start improving heating provision in Timisoara. 1. Winter season: • Energy Efficiency Communication campaign for behavioral change, encouraging businesses, industries, and households to save energy. • Enhancing financial sustainability of Colterm: o Review tariffs and cost of services: with a view to optimizing the current tariff structure, minimizing inefficiencies. o Based on tariff review, improve targeting of subsidies, focusing on supporting low-income households. o Potentially design a tariff deficit financial facility: to cover the gap between tariffs and costs in a systematic manner (instead of yearly/ad-hoc adjustments). o Start the preparation of a cost reduction plan: identifying quick wins for reducing the company’s operational costs 2. District Heating and Energy efficiency – technical solutions • Design DH pilots: o Collect data and confirm assumptions and costs/heat map prepared for the study, to build a thermal model. Identify the most “problematic” PTs- with high losses and low energy supply, hence high cost of heat supply, where an alternative solution could be envisaged. Analyse origin of losses, focusing on the state of the network, categories of customers, payment history etc. o Analyse thermal dynamic of the system with disconnections o Carry out feasibility studies for specific solutions/pilots based on the proposed solutions analysed in report focusing on node disconnection with neighborhood solution. Reconcile with the ongoing network renovation program. Focus on solutions that (i) could easily receive outside funding (mostly RE based solutions), and (ii) involve a specific area of the grid (called “neighborhood solutions” in the report) that it set to be rehabilitated, for quick results and lessons learnt for potential scale-up. • Design EE program: 138 o Announce publicly which scenario for EE renovation for MABs and public buildings is chosen, among the three scenarios presented in the study o Explore the possibility of coupling EE program with Demand Side Management (DSM) system in apartment and buildings. This could be done using Heat Cost Allocators (HCA) and Thermostatic Radiator Valves (TRV). o Under the communication campaign (see below), raise awareness of combined EE / DSM and showcase some examples from other countries through the Covenant of Mayors (COM) network. • Prepare and submit DH and EE projects o RRP/REPower EU (DH and EE) o Renovation Wave (EE) 3. Governance • Appoint a manager/director who will be responsible for municipal energy, together with a multi-disciplinary team. Multi-disciplinary team, e.g. with staff from the current city hall departments of: strategic planning; “project incubators”; legal; procurement; budget; technical (networks, energy efficiency in buildings, investments); participative governance; and urban management. To be placed under the coordination of the deputy mayor, with clear responsibilities and mandate (terms of reference for each member). • Define new institutional framework for provision of municipal energy services. In particular, define what arrangements will be put in place for the operation of DH services in the city. Whatever the institutional set up (new entity, Colterm/degree of involvement from private sector), the strengthen the governance framework, in particular clear/separate roles between the entity in charge of operating DH and the Municipality’s own oversight responsibilities. The entity within the municipality would have an overarching strategic role, while a company or more companies should put into practice the measures where the municipality has direct intervention tools, mainly assets (e.g. DH, energy production capacities apart from current DH, land). The role of the private sector in DH (parts of the services to be provided by a municipal company, or subcontracted to a private entity, or concessioned to a private investor) does not necessarily need to be defined immediately. • Establish connections with other institutions inside and outside the country, including through the Covenant of Mayors (CoM) for insights into best practices, lessons learnt, training etc. • Strengthen technical capacity of the team: build on existing network, liaise with municipalities with solid track record on energy strategy (including in Romania Oradea or Brasov). Identify needed skills, seek good practices, use the various training or knowledge sharing opportunities provided by Covenant of Mayors. Focus on critical skills such as: data collection needs; stakeholder engagement; state aid, services of general economic interest 139 and concession contracts; project preparation for EU funds; procurement; but also broader skills, such as preparation of the strategy, strategic planning and budgeting, leveraging of public and private financing and monitoring / feedback for adjustments of the strategy during implementation. • Design and implement a communication strategy focusing on the key measures above: o Short term goals: challenges of winter season in the current context (gas, Ukraine) and rationale for ST measures (including EE communications campaign). o Launch the preparation of the strategy, for instance: make the roadmap proposed in the analysis public, after review/revision by the Municipality, sharing key milestones publicly to provide clarity and transparency on the whole process. The launch of the strategy would mark the start of a consensus/trust building process that would involve key economic/social stakeholders to ensure a better provision of heating in the city, with efforts to explain the current situation (including the legacy of depleted infrastructure) and objectives, with steps to achieve them. This is also the first step towards building an energy atlas, which will represent an important element of the DH/EE strategy, which will involve a broad stakeholders’ mapping, and collection of data across main economic/industrial sectors (as described in the report). This will be completed over a longer horizon. 140