Major differences between the district heating tariff systems in Sweden and Donetsk .

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Background of Donetsk

The city of Donetsk is an industrial center and the capital of the Donetsk region. The city is located in the eastern part of the Ukraine at a distance of about 500 km south-east of Kiev. The city of Donetsk is the fourth-largest city in Ukraine with approximately 1 000 000 inhabitants12.
The city of Donetsk has a well-developed social sector with the provision of education, health and cultural services. The scientific and cultural potential of the city are associated with the strong industrial tradition and basis on one side, and with the presence of leading universities and their branches, supporting the continued development of the city and the region on the other. The infrastructure in the city is well developed; basic infrastructure services such as electricity, water, sewerage, heating and solid waste collection and management cover practically the entire city area. However, the infrastructure services are not always working in a reliable way, partly due to outdated technology and damages.
The annual production of municipal waste in the region is 470 000 tons13, and taking care of such volumes has during the last years become an increasing problem. The existing landfills are on the edge of closure due to the environmental risks and overflow, placing the city of Donetsk in a dangerous position where the local authorities have to come up with some solution. One solution may be an erection of a WTE plant. A WTE plant would relieve the pressure on the existing landfills by incinerating the municipal waste. Incineration of waste with today’s technologies will generate production of electricity and hot water, the latter of which can be directly used as both hot water and to warm up buildings and living spaces.

Background of EcoEnergy Scandinavia AB

During the last two decades, more and more environmental issues have come into focus. A consciousness about the limited natural resources of oil, coal and gas has triggered the search for renewable and sustainable sources of energy.
At the same time, the problem of waste and landfills are becoming critical. In some countries almost 100% of the household waste is transported to landfills18. The landfills are at the same time creating a possible source for deceases and poisoning of the environment. The generation of waste is strongly linked to the economic situation in a country. Increased wealth leads to a larger amount of waste. As an example the amount of waste within the EU varies from slightly less than 300 kg/capita (Czech Republic) to approximately 750kg/capita (Ireland)19. At the same time biological type waste is also an increasing problem for a number of industries.
Turning the energy from Municipal Solid Waste into electricity, heating, cooling, process steam and potable water as well as using biological refuse and biogas for diminishing the society´s need for energy has become a viable alternative to the use of oil, gas and coal at the same time as it solves the society’s different waste problems20. Another strong driving force for incineration is to reduce its impact on the climate from greenhouse gases that many components of landfill gas actually are. Landfill gas is estimated to be 40-60% methane. The remainder is mostly carbon dioxide. Landfill gas also contains varying amounts of nitrogen, oxygen, water vapor, sulfur and a hundreds of other contaminants – most of which are known as « non-methane organic compounds ». Inorganic contaminants like mercury are also known to be present in landfill gas. Sometimes, even radioactive contaminants such as tritium, that is radioactive hydrogen, have been found in landfill gas21. However the focus is often put on the methane, due to the fact that methane leaking landfills are a very real threat to the climate since methane about eighty times stronger greenhouse gas than carbon dioxide22.
Sweden has a long standing history of handling the problem of waste and biological refuse and turning it into useful energy. Hence the amount of household waste that went to landfills in Sweden during 2009 is only 1,4% of the total amount actually produced by society23. Sweden´s knowledge regarding the technique for Waste to Energy and handling of biofuel refuse represents a business possibility that could be exploited all over the world.
EcoEnergy Scandinavia AB is a Swedish energy recovery company whose objective is to develop, design, finance, build and operate WTE facilities on the global market. By treating waste and residual products efficiently and environmentally for municipalities and industry, EcoEnergy provides energy (electricity, heat, cooling and process steam) for an enhanced living environment and a sustainable development24.
The company has two main business areas; EPC Turnkey Contractor and Project Development & Finance. EcoEnergy´s personnel have been involved in the design, procurement and construction of the ten latest WTE facilities in Sweden. EcoEnergy has identified this as an opportunity to export Swedish knowledge and turn it into a business in itself. In order to take care of this knowledge and experience EcoEnergy have combined its resources regarding Waste to Energy and biofuel for an international venture into the energy providing field25.

Description of a WTE plant

A WTE plant that EcoEnergy is planning to build in Donetsk resembles the ones that are commonly used in the Scandinavian countries and in the central Europe. Regular household waste will be used as the fuel, and no separation of waste will be done before the incineration. Therefore, the plan is to use the reciprocating grate incinerator, which is the most common incinerator used nowadays. The heating value of the fuel that can be used in a reciprocating grate incinerator is between 6,5 – 19 MJ/kg26.
Due to the robustness of such an incinerator, it allows large variations in the composition of the fuel, which fulfills the condition of not separating the waste before feeding it to the incinerator. A single reciprocating grate boiler can, at the present time, handle up to 50 tonnes of waste per hour and operate 8000 hours per year with only one scheduled stop for inspection and maintenance of about one month’s duration.

Information gathering

The information used during the work on this thesis was obtained mainly through the interviews, document studies, literature studies and observations. The core part of the study was conducted through an in-depth analysis of the situation within the different systems and therefore by the means of collecting qualitative data33 in the field it is a qualitative study. Furthermore, a comparative analysis of the two heating tariff systems have been performed in order to outline and highlight the differences between them and to answer the main questions of the study.

Study in Sweden

The study in Sweden had a preparatory character and aimed to get a deeper insight into the problem before conducting the main field work in both Sweden and Ukraine. The methodology that was used during the preparatory study in Sweden was literature and documents studies, the larger part of these studies was conducted in Stockholm. It included the study of the Swedish heating tariff system, the laws of Ukraine that were considered significant to the heating tariff system, the statistic data regarding tariffs in different cities, the reports provided by EcoEnergy together with other information that was available in EcoEnergy’s Stockholm office. The reports that were studied are confidential. However, I was granted permission to refer to some of the parts of these reports in my thesis report and I shall refer to them as “EcoEnergy confidential internal information”.
While performing this study many interesting documents were discovered, analyzed and used in the thesis work. The study of the Swedish heating tariff system consisted mostly of the literature and internet research that was made in Stockholm. Due to the fact that most information that was needed for the study of the Swedish heating tariff system is well-documented, there was little need for the interviews. However, the contact was made with Swedish District Heating Association where additional hints about the studied area were received. The main focus was put on large private companies such as Vattenfall, E.ON., and Fortum.

Field study in Ukraine

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In order to get a deep and thorough insight into the Ukrainian heating tariff system, a field study has been conducted in the capital city of Kiev and the city of Donetsk. In both cities, a large part of the empirical information gathering was done. Due to the nature of the studied system, the physical presence in the field was necessary in order to obtain certain information about the Ukrainian heating tariff system, laws and legislations for that specific area and procedures that are being used on different levels to calculate, assert, regulate and change the tariffs.


The main methodology that was used during the field studies in Kiev and Donetsk was interviews, literature and document studies, observations and study visits.
Interviews are commonly being one of the primary sources of information in many case studies. In the study conducted in Ukraine, the interviews were an essential source of the information. Following the definition of an interview used by H. J. Rubin & Rubin34, the interviews used in Kiev and Donetsk were more or less guided conversations, rather than structured queries, where I have chosen to pursue a consistent line of inquiry while keeping the actual stream of questions fluid rather than rigid.35 The interviews held during the study had a semi-structured and in-depth form. That enabled me to ask the respondents about the facts as well as their own opinions about the situation. Getting an answer about the respondents’ opinion, however, was not always possible due to the nature of their position. Altogether, the main plan was to get as much valuable information as possible without intimidating the respondent and therefore excluding the possibility of getting genuine answers.
During the preparatory work before the field visit to Ukraine, the key organizations that according to my estimations were able to provide the information regarding heating tariffs were identified. After that the initial contact was made with them in order to make a preliminary booking for the meetings. However it soon became clear that a physical presence would be necessary to get both the attention and contact needed for securing the meetings. With the help of EcoEnergy’s partner BiogasProm and recommendation letters, it finally became possible to successfully book the meetings with the key persons within the organizations that were directly and indirectly involved or had certain knowledge in the studied area.

Ethics and credibility

During the early stages and through the whole field study in Ukraine it became clear that the persons that were interviewed did not allow me to use their names in the official version of the report. The reason for that is that some of the information that was obtained during the interviews can be viewed as sensitive but nonetheless is important to the study and therefore had to be used in the analysis. Even though I could not use the names and subsequently the positions of the interviewees in the official version of this report, I was granted a permission to refer to the organizations to which the interviewees belonged. The interviewees from the key organizations that were chosen for closer study subsequently acquired the role of informants, and were critical to the success of the study43. The informants provided the insight into the situation and at the same time initiated access to corroboratory and sometimes contrary sources of evidence. However, taking in account the risks of getting distorted information from an informant, that were highlighted by Yin (2009), the study relied on other sources of evidence to corroborate any insight by such informants and to search for contrary evidence as carefully as possible.

Price discrimination

Price discrimination is a phenomenon that appears when a firm makes a transaction of identical goods or services to different consumers at different prices, regardless of the fact that the prime cost for the product or service remains unchanged44. The situation can also be regarded as a form of price discrimination when a consumer pays the unchanged amount of money for a product or a service even though there are variations in the prime cost of the offered product or service. Generally speaking, the price discrimination phenomenon appears when the difference in price between the consumers is not proportional to the difference in the firms’ expenses to provide the product or the service to the consumer.
This price discrimination theory was chosen to study the Ukrainian heating tariffs in order to understand how and why they are set and managed the way they are today.

Two-part tariffs in a monopolistic competition

When a firm has a sort of monopoly position, it also usually gets the power to price discriminate. Then, the existence of a firm using a two-part tariff in a competitive market would be unmotivated when another competing firm could always charge a single price that consumer would prefer and earn a certain profit45. But the reality seems to be different from the standard assumptions, and two-part tariffs do exist in many markets that are competitive.
In her paper, Hayes (1987) embarks upon showing and explaining why monopoly power is not required for the existence of a two part tariff, that two-part tariffs can often be found in environments with uncertainty, and that often the price discrimination using two-part tariffs is preferred by consumers to a single price in competitive markets.
In the case with heating in Donetsk, because of the specific nature of the product, the consumers’ demand is homogenous. When consumer’s demand is homogeneous, an assumption can be made that the market consists of a certain amount of identical consumers. In order to understand this model, the focus is put on one consumer who interacts with a firm which has no fixed costs and costs per unit are constant – that gives the horizontal marginal cost line. In the table 1 it is represented by MC line.

Table of contents :

1 Introduction
1.1 Problem background
1.2 Main questions
1.3 Objective of the study
1.4 Scope and Delimitations
1.5 Target Group
1.6 Outline of Report
2 Background.
2.1 Ukraine
2.1.1 Facts
2.1.2 Economic affairs
2.1.3 Background of Donetsk
2.1.4 Background of EcoEnergy Scandinavia AB
2.1.5 Description of a WTE plant
3 Methodology
3.1 Scientific approach
3.2 Information gathering
3.2.1 Study in Sweden
3.2.2 Field study in Ukraine Interviews Study visits and observations
3.3 Ethics and credibility
4 Theory
4.1 Price discrimination
4.2 Two-part tariffs in a monopolistic competition
4.3 Salient and reverse salient
4.4 Public Choice
4.5 Public Good
4.5.1 The Free Rider Problem
4.7 Externality
4.8 Important terms
5 Study in Ukraine
5.1 Study in Kiev
5.1.1 Different types of heating tariffs used in Ukraine.
5.1.2 One part tariff
5.1.3 “Season” tariff
5.1.4 Two-part tariff
5.1.5 The Interaction “triangle”
5.1.6 Calculation of the heating tariffs in Ukraine
5.1.7 New regulatory commission for the heating tariffs
5.2 Study in Donetsk
5.2.1 Organizational and institutional assessment of the Donetsk City Heating Company:
5.2.2 Key figures of Donetsk City Heating Company
5.2.3 Supply of heat energy in Donetsk
5.2.4 Heating tariff in Donetsk
5.2.5 Donetsk Oblast Heating Company and Donetsk City Heating Company
5.2.6 Discovered weak spots within the heating tariff system – Moldova example
5.2.7 Discovered weak spots within the heating tariff system – Ukrainian case
6 Study in Sweden
6.1 History of district heating in Sweden:
6.2 Swedish district heating system today
6.3 District heating tariffs in EU and Sweden
6.4 District heating in Sweden – a natural monopoly
6.5 Heating tariff system in Sweden
7 Analysis and results
7.1 Major differences between the district heating tariff systems in Sweden and Donetsk .
7.1.1 Comparison of the typical European district heating company and Donetsk city heating company
7.1.2 Political situation
7.2 Consequences of the managing of the heating tariffs in Donetsk on its district heating system
7.2.1 Heating tariff system as reverse salient
7.3 The “Free Rider” Problem of the District Heating in Donetsk
7.3.1 Possible solution to the “Free Rider” problem
7.4 Negative externality in the heating tariff system of Ukraine
8 Conclusions and Reflections
8.1 Conclusions
8.2 Proposed steps for improved management of heating tariffs in Donetsk
8.3 Credibility
8.4 Suggestion for further studies
9 References


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