The reform of heat pricing and billing is a crucial part of overall heat reform, according to a report recently released by the Energy Sector Management Assistance Program (ESMAP) that builds on analytical and advisory work in China's energy sector.

The report, China: Development of National Heat Pricing and Billing Policy, concludes that heat pricing and billing reform is essential to address the inefficiencies in the country's heating industry built on welfare-based principles. The reform will establish economic incentives to provide and use heat much more efficiently and is also critical to the success of another important government policy agenda: achieving sustained energy efficiency improvements in buildings.

About 250 million people live in the densely populated urban areas in China's heating zone, consisting of cold regions in the northern part of the country, where space-heating is needed three to six months per year. Space heating in China is almost exclusively dependent on coal, and is fast growing.

"Heat pricing reform is essential to making heat a commodity and introducing market mechanisms to the urban heating sector and will contribute to substantially reducing local and global emissions,” according to Gailius Draugelis, World Bank Senior Energy Specialist who managed this activity on behalf of ESMAP. "Applying this methodology is an important step to improve the heat pricing system. As emphasized in the report, the methodology needs to be developed further in order to move from a transitional stage toward a fuller realization of the heat reform objectives."

The report, developed in cooperation with a large number of Chinese experts from the national government and from four cities, recommends a heat pricing methodology that is based on recovering the full costs of the core heating business. Under the methodology, heat consumption would be metered, at least for buildings, and two-part tariffs would be introduced. The tariffs consist of an energy charge depending on consumption and of a fixed charge depending on capacity. Other important components of heat pricing reform include the complete shift of responsibility for paying heat bills to consumers, targeted support for poor consumers, and the introduction of partial price adjustment clauses. Tianjin became the first large city to adopt similar reforms, which have also been incorporated into central and local government policy decrees.

"This report on China's heat pricing exemplifies the analytical, advisory, and knowledge clearinghouse activities of ESMAP support to clients," said ESMAP Program Manager Amarquaye Armar. "We encourage the sharing of knowledge across regions so that countries in similar situations can benefit from successes abroad, such as those seen in this example from China."

The Energy Sector Management Assistance Program (ESMAP) is a global knowledge and technical assistance partnership administered by the World Bank and sponsored by bi-lateral official donors since 1983. ESMAP's mission is to assist clients from low-income, emerging, and transition economies to secure energy requirements for equitable economic growth and poverty reduction in an environmentally sustainable way. ESMAP is governed and funded by a Consultative Group composed of representatives of Australia, Austria, Denmark, France, Germany, Iceland, the Netherlands, Norway, Sweden, the United Kingdom, the UN Foundation, and the World Bank.

(China Development Gateway August 12, 2008)