July 16, 2012

District Cooling: GCC States Have an Opportunity to Reap GreatBenefits from District Cooling

Booz & Company examine the strong need for GCC governments to incorporate district cooling into their urban planning so as to further ensure sustainable economic growth.

Today, air conditioning in the Gulf Cooperation Council (GCC) accounts for a staggering 70 percent of annual peak electricity consumption. Such heavy cooling demand is expected to nearly triple by 2030. By then, the fuel needed to power air-conditioning in the GCC will be the equivalent of 1.5 million barrels of oil per day. In light of this, management consulting firm Booz & Company has identified that, if implemented under the right conditions, district cooling could effectively serve 30 percent of the region’s cooling requirements by 2030.Perfectly catered to densely populated areas, district cooling offers a more cost-efficient and eco-friendly solution for the GCC – and one which can only thrive through market reforms.

The Case for District Cooling in the GCC
If it maintains its existing pattern of cooling technology deployment with heavy reliance on conventional cooling technologies, by 2030, the GCC will have to invest approximately $100 billion for new cooling capacity and over $120 billion for new power capacity. Over the next 18 years, air-conditioning will account for 60 percent of additional power generation required in this part of the world.

However, there is an alternative option. By pooling demand for air conditioning, district cooling is significantly more cost effective over the long term than any other system currently being employed at the individual building level. “It also has less negative environmental impact than conventional solutions” said George Sarraf, partner with Booz & Company. “With these countries likely to urbanize further in coming decades, district cooling could save them from investing considerable sums on new power stations.”

A More Sustainable System: At present, district cooling is one of three main systems used for air-conditioning in the region. The two others include conventional window units or split systems as well as central air or water-cooled chillers. In contrast to those systems, district cooling is decentralized, and involves central plant supplying chilled water through a network of pipes to multiple buildings within a local area.

“In district cooling, the network entails an important additional cost which, on a “per-user” basis, decreases with increasing real estate density, and can be offset by the higher efficiency of the system,” explained Dr. Walid Fayad, partner with Booz & Company.
By offsetting network costs, district cooling provides three main advantages:

  1. Lower energy requirements: Thanks to more efficient chiller technology and more professional O&M, district cooling typically consumes 40 to 50 percent less energy for every refrigeration ton hour than conventional in-building technologies.
  2. More efficient capacity use: District cooling typically needs around 15 percent less capacity for the same cooling loads than distributed cooling systems at the unit level due to load diversity and flexibility in capacity design and installation.
  3. Peak-period saving potential: District cooling offers a thermal storage capability that can reduce the strain on the power system at peak hours by storing up to 30 percent of potential output.

Given that the net advantages of district cooling are apparent in areas of sufficient density, the system is, by no means, a universal solution to cooling.

Impacting the Region’s Future: Based on existing development plans and estimated density patterns, district cooling could play a particularly important role in the future of GCC countries. According to an analysis by Booz & Company, by 2030, consistent use of district cooling in the region could lead to:

  • A reduction of 20 gigawatts in new power capacity requirements – the equivalent of 10 large power plants.
  • A reduction in the GCC’s power plant fuel consumption equivalent to 200,000 barrels of oil per day.
  • A region-wide decrease of 31 million tons per year in CO2 emissions
“From a qualitative perspective, district cooling offers a more reliable service because of on-going professional operation and maintenance,” explained Tarek Elsayed, Principal at Booz & Company. “Also, the system is quieter than conventional cooling systems and more visually appealing as it is located remotely rather than on the roof of a building.”

The Need for Market Reforms
Current market structures in the GCC make it difficult to recognize and capitalize on the benefits of district cooling. “In many cases, power prices are overly low, making district systems appear competitive with conventional cooling systems only at high levels of cooling density,” said Simon-Pierre Monette, Senior Associate with Booz & Company. “Moreover, property developers often fail to appreciate the advantages of combining their cooling demand and are wary of the technology as it requires significant initial investment.”

Inefficient Deployment: Despite their countries’ high temperatures and levels of humidity, most governments in the GCC have not regarded the provision of air-conditioning as a matter requiring public policy and planning. Instead, they have permitted an unregulated market to determine when and where to use different cooling systems, and to decide how to pay for them.

“As a result, district cooling has not been used sufficiently where it is appropriate, and it has been used where it is inappropriate,” added Elsayed. “As GCC countries continue to develop their economies, this misuse of an important technology will prove costly.”
Essentially, there are four reasons for the suboptimal deployment of district cooling in the region:

  1. Non-aggregated development decisions: Developers of individual buildings often opt for in-building systems as this usually involves an easier, faster, and cheaper process which doesn’t require having to align plans with those of other developers.
  2. Non-economic utility pricing: The low electricity tariffs in the GCC obscure the economic advantages of district cooling. As a result, property market participants, whether developers, investors, or buyers, mistakenly believe that district cooling works –economically – only for high density developments.
  3. Cost misperceptions: The methods that developers use to pass on cooling costs to end-users make district cooling appear artificially expensive, while flattering conventional cooling. Thus, a technology that actually saves money for the ultimate user comes across as being pricey because of different approaches to cost recovery.
  4. The risk of early investment: Perhaps the greatest market handicap faced by district cooling is that it requires front-loaded investment.

In addition to these structural problems, district cooling is also suffering from two self-inflicted wounds, which include:

  • Poor load planning: district cooling providers and property developers have repeatedly overestimated cooling requirements, largely due to overly optimistic load assessments by real estate developers. There have also been cases where providers and developers have paid insufficient attention to the critical factor of cooling density.
  • Inconsistent cost recovery models: District cooling has also damaged its own cause through complex and inappropriate cost recovery models, where the allocation of connection, capacity, and consumption costs among developers, owners, owners’ associations, and individual tenants vary from project to project.
The Role of Governments
‘Given these issues, GCC countries will solely be able to deploy district cooling optimally with adequate support and guidance from the government’ said Dr. Fayad. As with other utilities, district cooling requires a proper regulatory framework that protects developers, providers, consumers, and the broader economy. Varying from country to country, the form of government intervention should aim to be consistent and cover the three following areas:

  1. Designation of appropriate zones: Governments should mandate district cooling in defined areas where density levels render it appropriate.
  2. Tariff regulation: Governments should establish a consistent national tariff framework for dis¬trict cooling.
  3. Service standards and technical codes: Governments should define the basic levels of reliability and performance required of district cooling providers, as well as accompany these requirements with technical codes to ensure quality in the design and installation of assets.
‘A further option for GCC governments is to become economically involved in the market, thereby directing the expansion of district cooling as an economic actor rather than simply as a rule-setter’ added Monette. They can do this by assuming one or more of three potential roles, which include Network Owner, Single Buyer, or Universal Retailer.

“Governments can perform these economic roles singly or in combination,” said Sarraf. “The appropriate degree of government participation will depend on the degree of price distortion introduced by price support for power tariffs and the expected density of future urban development.”

As the region plans for an increasingly urban future, now is the time for the GCC to recognize the substantial benefits of district cooling. Providing considerable increases in environmental protection, comfort, operational efficiency, and cost advantages, there is no doubt that this technology brings superior cost-effective and sustainable solutions – albeit ones which necessitate resolute government intervention. Indeed, by treating district cooling as the utility it is and perhaps taking an active role in its provision, governments can use this promising technology to enable their development in a sustainable way.