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Tariff troubles

Palm District Cooling are planning to adopt a new model

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Palm District Cooling keep the Palm Jumeirah cool.
Palm District Cooling keep the Palm Jumeirah cool.

Palm District Cooling are planning to adopt a new model for financing their district cooling plants, hoping to replace an incremental reimbursement with an upfront charge. But will this model be accepted, and is it the best way to encourage end users to reduce their energy consumption?

District cooling companies have not been left unscathed by the recession, as banks were unwilling to dispense credit, and the district cooling business was affected by the slowdown in construction activity. This has left the industry searching for new ways of gathering the necessary funds for the construction of their plants.

Palm District Cooling have come up with what they see as a viable alternative to the existing model, says Shafiq Khoori, managing director at the company.

Up to now, district cooling companies have covered the costs of constructing plants and piping through an annual capacity charge, by which the capital investment is recovered over the life time of a plant by charging end users a set amount every year.

Palm, who have supplied district cooling to the Palm Jumeirah, Jumeirah Lake Towers and Discovery Gardens developments in Dubai, are now looking to recoup construction costs with an upfront charge paid by the developer of residential complexes.

“We’ve developed a new tariff model to move away from the annual capacity charge,” says Khoori.

“This model mirrors how an investment in a conventional system looks like. For example: if you are building a typical building here in Dubai, you buy your own chillers, so there is a cost outlay.

We said, instead of people paying this money towards their own chillers, we collect these moneys, and we build a central cooling plant and a network, and serve them with district cooling. There is no ongoing capital recovery. Its upfront, and it costs a similar amount to what it costs to have a chiller.”

The company is hoping to implement the new model at one of the projects they are currently involved in. “We are trying to implement it here at Jumeirah Village South for the first time,” reveals Khoori.

Residents would only be charged for the consumption on a meter basis under the new model, says Khoori. He admits that his company will have work on its hands to convince stakeholders of the model, starting with the developers.

"We have to find out the concerns of all stakeholders, because its a new model, and we have to address all the doubts and questions. So we are trying to show developers that the cost is very nominal and will not make their properties unmarketable.”

Convincing the sceptics might be an uphill task. “This proposal essentially solves a problem by replacing it with a bigger one,” says Hans Altmann, regional manager at Techem, who produce radio metering devices and advise on power consumption issues.

He believes that developers faced with an upfront capital investment on district cooling would simply pass that cost down to prospective buyers of their properties.

The additional cost would not be negligible, as Khoori argues, and would place developers at a distinct disadvantage when trying to sell their residential units.

“A district cooling provider following such a model would improve his cash flow, but makes the properties in questions less attractive,” Altmann says.

Furthermore, the new proposal could lead to property owners eschewing the district cooling option, avoiding huge upfront costs by turning to conventional split unit air conditioning, which comes at a much lower capital expenditure.

“End users would in that case not be too concerned whether that is an environmentally friendly option or not,” adds Altmann.

Incentivising savings
Like it or not, the cost of building a district cooling or a central cooling plant will have to be borne by someone. The challenge is to come up with a pricing structure that incentivises reduced consumption while also covering the costs.

Fixed capacity charges currently represent a big part of the end user’s cooling bill, says Altmann. Only a small proportion of what a consumer ends up paying actually corresponds to the consumption of individual apartments.
Consequently, efforts to lower consumption will only be rewarded by a negligible reduction of the overall bill. “If I want to save on my cooling bills, I can only do so on ten or 20 percent of the bill. And I personally wouldn’t want to sweat to save 20 dirhams or so.”

Yet reducing energy consumption has become imperative in the GCC, due to the massively expanding demand for power and a nascent environmental awareness.

Fortunately, models that encourage energy savings already exist in Europe’s district heating sector, and can be adapted to the region’s district cooling industry.

European countries, where district heating has been in use for decades, have long since adopted a pricing mechanism in which households not only pay for water and energy costs in proportion to their usage, but also pay their part of the fixed costs in relation to their usage.

Under such a system, consumers who are keen to reduce their utility bills will end up with real savings, says Altmann.

“Unlike here, in countries such as Germany and France it has been enshrined in law that fixed costs have to be part of the cost equation for households,” he says. “You have to make saving attractive to people.”
According to Altmann, there are currently discussions about such a law in Dubai, but it is hard to predict when it will come into force.

It is debateable whether enticing end users is high on the list of district cooling providers. It is equally debateable whether decisions such as these should be down to them.

Altmann is adamant that the industry needs to be regulated properly, and he makes a strong case: “District cooling could become the biggest consumer of energy in the Emirates within a short period of time.”

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