OPET Cluster District heating and co-generation. Lithuanian Energy institute (LEI)

Transcription

1 LITHUANIAN ENERGY INSTITUTE OPET Cluster District heating and co-generation WP1 Development of DH/CHP sectors in the CEEC. Systems Phase 1 District Heating Sector Level LITHUANIA Lithuanian Energy institute (LEI) European Commission (Directorate-General for Energy and Transport) Contract no. NNE5/2002/52: OPET CHP/DH Cluster

2 Author(s): Romualdas Skema, Vygandas Gaigalis Organisation: Lithuanian Energy institute Address: Breslaujos str. Nb. 3, LT-3035 Kaunas, Lithuania Tel.: +370 (37) Fax: +370 (37) Web: The project OPET CHP/DH Cluster has obtained financial support from the European Commission (Directorate-General for Energy and Transport) under the contract no. NNE5/2002/52 for Community Activities in the Field of the specific programme for RTD and demonstration on Energy, Environment and Sustainable Development Part B: Energy programme The responsibility for the content on this publication lies solely with the authors. The content does not necessary represent the opinion of the European Community and the Community is not responsible for any use that might be made of data appearing herein.

3 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 1 Table of Contents Introduction 1 DH/CHP Sector Organisation Review of Key Actors Company Structures 4 2 Heat Market Research and Technological Development Activities Availability of financing for DH/CHP Investments for refurbishment and upgrades Human Resource Development Needs Needed Tools for DH/CHP Sector Development (Outlook for Phase 2) 21 3 Sources of Information Internet Laws, Regulations and National Policy Documents 22

4 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 2 Introduction Lithuania has well developed DH system. About 45% of household are connected to DH systems. In urban areas 73% of building are connected to DH systems, while in rural zones only 1%. Development of DH systems was initiated in the 1960 s. In 2003 are 47 DH companies. They produced more than 10 TWh thermal energy annually. This report outlines the key challenges connected with the development of the DH sector and harvesting of the related energy efficiency and renewable energy potential in Lithuania. The report is a basis for the developing and dissemination of DH sector development tools, which will be developed in phase 2 of WP 1.

5 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 3 1 DH/CHP Sector Organisation 1.1 Review of Key Actors DH sector The Ministry of Economy supervise district heating sector in Lithuania. In energy and heat affairs, the Ministry is relying on the Lithuanian Energy Agency, which is a state enterprise with the general tasks to offer support for preparing new legislation, to implement the Energy Strategy and the National Energy Efficiency Programme (including to seek foreign assistance for their implementation), and to gather information on the energy sector in general, including electric power, gas, oil and other fuels. Other relevant institutions for the energy sector in the non-nuclear fields and particularly for DH are: the state Energy Inspectorate under the Ministry of Economy which is responsible for observing the technical requirements and regulations of exploitation; and the State Control Commission of Energy Pricing and Energy Activities, formed by Presidential Decree and reporting to the Seimas, which is responsible for the approval of the prices of electricity, heat and natural gas as well as for the control of economic activities of enterprises Association of DH utilities In 1998 was established Lithuanian District Heating Association. LDHA is nonprofit association representing the interest of the Lithuanian District Heating companies, organizations and other associated energy structures in the heat sector and represents their rights. The Association comprised of 35 members, 25 of the total membership comprise District heating companies, which produce and supply around 92% of the total heat through the District heating network in Lithuania DH companies In 2003 are 47 DH companies. 67% are owned by municipalities and 33% are leased. They produced more than 10 TWh thermal energy annually. The overall length of heat network is 2863 km and more than customers are connected.

6 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level Company Structures In Lithuania DH companies can be categorized in terms of - size (in km of pipe installed), - ownership and management, - production and distribution facilities. In Lithuania most district heating companies are municipally owned (67%). 33% to total number companies are leased. The lease of utilities to foreign (Dalkia, France, Finland Energy) and domestic investors was started in At the end of 2002 the first CHP (in the city Kaunas) was privatized. 26 DH companies from total 47 are the biggest in Lithuania and during 2001 produced 74,1% of the total district heating total number of customers connected more than route length (km) 2863 km connected heat load (from CHP+HOBs) (MW) more than 9000 MW installed capacity (MW) MW. Ranking of 3 largest scheme in the country DH company Number customers connected Route length Installed capacity (thermal and electric) Vilniaus energija km 2432 MW Kauno energija km 2134 MW Klaipedos energija km 1042 MW Municipalities own 67% of DH companies, 33% are leased. The lease of heat utilities to foreign and domestic investors started in companies are leased by Lithuania-French joint stock company, 2 companies by Finnish Power Company and 4 companies by local investors.

7 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 5 2 Heat Market In 2001 the total final heat consumption was TWh TWh was consumed by the residential sector. During the average annual decrease of heat consumption was 3.7%. 45% of households are connected to DH systems. In urban areas 73% of buildings are connected to central heating systems, while in rural zones only 1%. Heat demand in main sectors (GWh, %) Heat sectors Heat demand in accordance to final consumption, 2001 GWh % Industry Agriculture Households Commercial and Public Services Total Residential heat market shares (% of total demand and in GWh) Type of heating Residential heat market shares, 2001 GWh % District heating Decentralise heating: - natural gas electricity others (coal, wood, liquefied gas, ect.) Total Specific heat consumption for residential sector in 2001: average surface for a family house is 150 m 2 ; average surface for an apartment is 60.1 m 2 (average useful floor surface per flat); the average family heat consumption including hot tap water is kwh/year/family; the average hot tap water consumption is 70 m 3 /year/family.

8 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 6 Production (total district heat delivered (GWh) Heat production (GWh) Heat consumption (GWh) Heat losses (GWh) Capacity in MWth 1997, 1999, 2001 absolute figures and variations in % Variation during in % Heat capacity (MW) % Combined Heat and Power in District Heating CHP heat capacity and production (publish supply and autoproduction) Installed heat capacity (MW) Heat production (Public CHP + autoproducers), GWh CHP heat: district heating in terms of capacities, heat production Installed heat capacity (MW) Heat production, GWh CHP heat: autoproduction in terms of capacities, production Installed heat capacity (MW) Heat production, GWh Other DH supply sources Installed heat capacity (MW) Heat production, GWh Public Heat Plants Autoproducers Utilization Equipment Ignalina Nuclear Power Plant Electric boilers Fuels used for DH Year Natural Gas Mazute and other production Other fuel ktoe % ktoe % ktoe % The turnover of DH companies for the heat sold in 2001 was 283 million Euro.

9 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 7 The main competition is between DH and decentralized heating (mostly on gas) in large cities. Heat consumers prefer decentralize heating to DH. Such situation appeared because the gas price does not reflect a liberalized gas market. However the importance of DH is emphasized looking at the advantages and opportunities that would be lost if the DH systems are economically destroyed: The possibility of co-generation would be lost this will especially be crucial in the case when the Ignalina Nuclear Power Plants is closed/decommissioned and it would be necessary to look alternative ways for producing electricity. Without district heating schemes the power plants cannot use the cogeneration option and must be based on other technologies, which are less efficient. Thus, the price of electricity will not be competitive. The emissions would increase significantly, which would affect negatively environment and the society. DH systems are integrated systems. Disconnection of some part of consumers will have a negative impact on the economic situation of DH companies and thus the remaining consumers. The largest cost will increase for a reduced number of customers due to unchanged fixed part costs of heat production and distribution. Competitive advantages Environmental aspects In Lithuania DH plants and CHP plants are located outside towns and equipped with chimneys of meters high. Therefore, flue gases are emitted high above ground level and dissipated in wider area, hence the absolute concentration of pollutants at ground level is significantly lowered. The high combustion efficiency in the big boilers results in cleaner combustion and thus less environmental impact than from less efficient private boilers. DH and CHP facilities enable the use of technologies such as cleaning combustion products in order to lower the environmental impact. Energy savings In Lithuania the fuel consumption in average represents 50% of the overall operation costs. These costs are reflected in the DH price. The flexibility regarding the use of different fuels and heat surplus is an important advantage of DH systems. Moreover around 30-40% of the wood potential is not yet utilized in Lithuania. In order to do so, it is necessary to install or modernize boilers of a total capacity of approximately 300 MW. This shows that the use of wood for heat generation can be increased significantly, eventually reducing the consumer heat price. DH systems possess another very important feature and significant advantage the use of surplus of thermal energy from industrial enterprises or other sources, thus reducing the imports of fossil fuel. Such examples already exist in Lithuania. Others Most of DH companies have more than one boiler plant, which are connected to the common heat distribution network, thus providing additional flexibility to the operation at low partial load.

10 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level Research and Technological Development Activities Lithuanian heat sector is facing serious economic and technological problems. Presently an almost adverse attitude towards DH and a rather skeptical view regarding the services of DH companies have evolved. The main problems are: After the collapse of the former soviet system, many enterprises went bankrupt and the heat consumption decreased sharply (halved) especially in the industry sector. Thus, many public heat plants, CHP plants, pipelines, pumps and other equipment became oversized and the relative maintenance costs increased. Moreover the systems and equipments are partly worn out. These factors affect directly the costs of heat production and distribution and thus heat prices. The gas price policy for consumers is not market based and distorts it. Although the principles are generally good, i.e. small gas consumers pay more per unit than big consumers and based on the amount of gas consumed, the price difference between small and big gas consumers still do not reflect the actual expenses of the gas suppliers. The gas price does not reflect a liberalized gas market. The environmental taxes are unevenly distributed. The owners of small boilers heating individual houses or multi-storey buildings do not pay environmental taxes, while DH companies usually do. These taxes influence the overall costs as well. DH companies struggle constantly with debts from heat consumers. Local and public state institutions are in most cases the main debtors of DH companies. In some municipalities also inhabitants of housing communities are in debt towards DH companies. It is difficult to force them to pay, because it is usually impossible to stop heat delivery to separate flats or force the debtors through other means. This has heavy impact on the financial situation of DH companies. When DH companies were transferred to the jurisdiction of the local municipalities (1997), the high debts of JSC Lietuvos energija (about LTL 400 million) were transferred as well. The repayment of this debt also put high pressure on the DH suppliers. The local municipalities and the National Control Commission for Prices and Energy regulate heat tariffs. In come cases, the prices do not cover the costs of heat production and distribution to consumers. Therefore, DH companies have a capital flow shortage forcing them to borrow money and pay interests to banks. All the reasons mentioned above have an impact on district heating price. No matter if the management of a DH company is good, the heat price is typically higher than 34.32/MW (without VAT). In most vary from 30.14/MWh to 44.62/MWh. The reduced heat consumption induces relatively high heat losses and calls for renovation of existing pipe systems and equipment. The installation of a completely new network would cost approximately LTL 6 billion, which is a huge amount for Lithuanian municipalities it is not easy to find money for renovation projects. The municipalities usually do not various juridical limitations. Thus in 2000, tenders for heat utilities lease were organized in many cities and regions. The objective is to attract foreign and domestic investors. In contracts, the tenders are frequently called upgrading and renovation of Heat Utilities.

11 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 9 Development of CHP/DHC in the last decade. During heat demand and production have decreased considerably: heat demand from TWh to TWh, heat production from TWh to14.61 TWh. The reform process in DH sector started in 1997 by the separation of the heat activities from special joint-stick company Lietuvos energija. The first stage of decentralization, during which 6 regional and 13 municipal DH companies were established, was rather successful. Though the newly established DH companies have inherited from Lietuvos energija quite big debts, the DH prices have grown only by 10-30% in comparison with the previously uniform price applicable for the whole country. Municipal companies were regulated by the municipalities (including price) and regional companies by the National Control Commission for Prices and Energy. The second stage of decentralization of DH sector was started in 1998 by dividing regional DH companies and establishing new DH utilities in cities and districts. The results of such process was not positive: the heat prices as well as customers debts increased in individual (the smaller) districts. Large district heat utilities had only fewer possibilities for taking loans for rehabilitation, the customers disconnected from DH networks. This stage is not fully completed. Now only one regional DH utility remained in Lithuania. A good tendency appeared in 2000: private capital has entered in the DH sector. Lithuanian foreign joint companies have taken several DH utilities on lease offering high investments for modernization and stable prices. Despite difficulties, positive developments/achievements of heat sector may also be mentioned: Natural gas supply has been installed in central boiler plants allowing for cheaper production of heat. New modern tube-style boilers with optimal capacity have been installed. They replaced the oversized Russian conventional heavy boilers making the operation of the system more flexible (starting-up and shutting down). Large fans for air supply and flue gas exhaust has been replaced by more efficient devices and/or equipment with frequently converters, and thus consuming much less electricity. The plant control equipments have been computerized, heat and hot water meters installed. About 1/3 new modern heat substations were installed. De-centralized gas-fired boiler plants were installed for those consumers, where a profitable DH operation could not be obtained due to long pipelines causing severe heat losses. Some DH companies have prepared investment plants for company further modernization and development. One may find examples on companies planning for implementation of new biomass boilers. In some cases these companies will have three different fuel options and will highly flexible to produce heat for lowest possible price. In order to modernize the energy sector, to utilize the country resources, to extend services to the energy consumers and suppliers, to maintain the high education potential, the structures of scientific research, design and consultative service institutions were established. During the last decade support was provided by foreign experts. The priority fields for scientific research are the following:

12 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 10 safety of nuclear energy, reliability and durability of energy equipment, age of materials for construction; management, storage and disposal in deep geological sites of used nuclear fuel and other radioactive materials; energy conservation and energy efficiency, energy related environmental aspects; technologies for renewable, indigenous and waste energy resources use; small scale CHP plants including fuel cells; energy economics, optimization of the design and the management of complex systems, optimization of technological processes and their control; operation of energy systems in a competitive market; operation of electricity, oil and gas equipment; informatics in the energy sector. In the field of technological development the main activities are: DH systems using natural gas are gradually equipment with CHP plants. The electricity price should be competitive with the cost of electricity produced by the Ignalina NPP; Metering equipment are installed in all sections of DH system, enabling accurate assessment of heat production volumes, transmission and distribution losses and the amount of heat supplied to the final consumer. This should lead to changes in heat consumers behavior; Steadily modernization of DH systems in order to provide consumers with possibilities to regulate their heat consumption; The heat supply sector is facing serious economic and technical problems. They can be solved efficiently only within the general strategy of the Lithuanian energy sector. In considering particular steps to be taken in promotion of CHP/DH, some major aspects are: 1. The gas pricing system must reflect a liberalized market. Thus the approved gas prices for small and big consumers must be revised reflecting market conditions. 2. Environmental tax must in principle be imposed to all kind of customers. 3. Regulation of the heat market and planning sector should be based on governmental priorities and not based on input from interest groups: by giving priority to the development of CHP production; by introducing modern technical solutions, using biofuel and industrial waste; by introducing means and systems that could ensure significant reduction of environmental pollution regionally and in the country; by increasing the efficiency of heat production, distribution and by reducing the consumption, and moreover at the same time ensuring effective utilization of expensive imported fuels. Some minor inefficient DH systems are out-performed. In order to improve the situation in the heat sector, a market mechanism could be created, facilitating a rational comparison of DH with alternative decentralized heat supply solutions. This should be done based on heat plans developed using least costs and minimal environment impact. 4. A system, ensuring competition in heat production, should be created. The operator of DH system should buy heat from independent heat producers. Priority should be given to reliability, environmental aspects and heat quality.

13 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level Other possible actions include: To eliminate the shortcomings of district heating supply; to improve the quality of provided services; to retrieve prestige of DH; try to regain former consumers and attract new ones; To ensure publicity of the activity of DH companies; to introduce the advantages and perspectives of DH supply to politicians, existing and potential consumers, as well as to society; To renovate existing heat sector by using local financial resources and attracting foreign investors. The priority should be given to investments which would result in reduction of comparative expenses for heat production, transmission and distribution; fuel savings in heat production; substitution of imported fuel by local and renewable fuel and emission reduction. 2.2 Availability of financing for DH/CHP Investments for refurbishment and upgrades Investment legislation The Law on Investments of 7 July 1999 contains the principal rules defining the terms and conditions for investments in Lithuania and is applicable to both foreign and national investors. This law does not regulate investment into commercial banks, insurance enterprises and other enterprises engaged in financial activities. Investments are considered to be the monetary funds and other tangible, intangible and financial assets, appraised in the manner prescribed by laws and other legal acts, which are invested for the purposes of generating profit (income), social results (educational, cultural, scientific, health, social security and in other similar spheres), or to ensure the implementation of state functions. Investors include the Republic of Lithuania, foreign states, international organizations, natural and legal persons of the Republic of Lithuania and foreign states, which invest, according to the procedure set forth in the Lithuanian laws, their own or borrowed assets or assets held and used in trust. Investment project means a document corroborating the feasibility of the project from the financial (economic), technical and social point of view, assessing the return on the investment (commercial investment) and other indicators of efficiency, indicating the funds required for project implementation as well as the sources and time limits of financing. The Law on Investments also establishes the forms of investment. Accordingly, investors may invest in Lithuania by the following means: 1. establishment of an enterprise or acquisition of a part or the whole authorized capital in an operating enterprise registered in the Republic of Lithuania; 2. acquisition of securities of all types; 3. creation, acquisition or increase of the value of long term assets; 4. lending of monetary funds or other assets to economic entities in which the investor owns a part of the capital, allowing the control or considerable influence upon such economic entity; 5. fulfillment of concession or leasing agreements.

14 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 12 The Law on Investments establishes the principle of equal treatment, which provides that foreign investors, during the investment period, enjoy the same rights and obligations regulating commercial activities like Lithuanian domestic investors, including the state and municipalities. In general, foreign investors have free access to all sectors of economy, subject to certain exceptions provided for in the Law on Investments, which are not applicable to the energy sector. General taxation issues The Lithuanian tax system is governed by the Law on Tax Administration and a number of specific laws on particular kinds of taxes. The Law on Tax Administration establishes the basic principles and regulations which must be observed in implementing tax laws, furnishes a list of taxes applied in Lithuania, establishes the rights and duties of the tax administrator as well as of the taxpayer, the procedure of tax computation and payment, collection of taxes and amounts hereof, as well as the dispute settlement procedure. At present, the following taxes are administered in accordance with the Law on Tax Administration: 1. value added tax; 2. excise tax; 3. personal income tax; 4. legal persons profit tax; 5. real property tax for enterprises and organizations; 6. land tax; 7. state natural resources tax; 8. oil and gas resources tax; 9. pollution tax; 10. consular duty, 11. stamp duty; 12. market place duty; 13. road tax; 14. inheritance or gift tax; 15. compulsory health insurance contributions; 16. tax for the lease of state land and water bodies; 17. contribution to the Guarantee Fund; 18. state duty; 19. gaming tax; and 20. tax for the registration of the objects of industrial ownership. Apart from the taxes specified above, there are also social insurance contributions, customs duties and local dues that are not regulated by the Law on Tax Administration. These three duties are administered by the Board of the Social Insurance Fund, the Customs Department and municipalities respectively. Corporate taxation The Law on Profit Tax of Legal Persons enacted on 31 July 1990 introduced the current system of the corporate profit tax. The taxable base is calculated by deducting various items defined by the said law from gross revenue. Gross revenue includes both income from the sale of goods and services and other income.

15 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 13 Various items as well as expenses related to the goods sold are deductible from gross revenue for the purpose of calculating taxable income. Lithuanian laws establish a list of tax-deductible expenses. A detailed specification of taxdeductible expenses can be found in the resolutions and instructions of the Ministry of Finance. All other expenses are considered to be non-deductible. At present, the statutory prescribed basic profit tax rate is 24 %. The capital reinvestment in an enterprise is currently calculated by using one of the two methods established by the Lithuanian tax legislation: a zero-rated profit tax may be applied to profit used for capital reinvestment, or, alternatively, the method of deduction of acquisition cost of tangible fixed assets from gross revenue may be applied. For the purpose of taxation, permanent establishments are defined as dependent structural units of foreign enterprises (including branches of foreign enterprises), which: carry out business wholly or partly in Lithuania; carry out business through a dependant representative (agent); use a building site, construction, assembly or equipment facility; and use equipment or structure, including drilling equipment and vessels, for mineral resources prospecting or extraction. A permanent establishment must register as a taxpayer with the State Tax Inspectorate in the territory where it carries out the activities. The profit of a permanent establishment is subject to the corporate profit tax at a rate of 24 %. Withholding taxes Under the Law on Profit Tax of Legal Persons, foreign companies are currently subject to withholding tax at a rate of 15 % levied on the following activities rendered to Lithuanian companies and permanent establishments of foreign companies: intermediary services; consultation services; market research services; design and engineering services; work organization services; management services; coordination services; assets lease; and sales or other transfer of assets. Foreign companies are subject to withholding tax at a rate of 10 % on royalties paid by Lithuanian companies and permanent establishments of foreign companies for the use of firms names, licenses, trademarks, invention patent, industrial design, semiconductor topography, secret formula or method, franchise, and on remuneration under individual creative assignment agreements.

16 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 14 Foreign companies are subject to withholding tax on interest generated from Lithuanian companies as well as permanent establishments of foreign companies at a rate of 15 %, except for: interest on loans issued by foreign banks and certain foreign financial institutions, interest on bonds issued by Lithuanian business subjects; and interest on securities issued by the Lithuanian Government and municipalities. As of 1 July 1997, special tax rules for income generated from Lithuanian companies by foreign companies registered in states and territories recognized as tax havens and their branches came into force. As many as 56 states and territories were recognized as tax havens. All payments made to tax haven companies or their branches for any kind of works or services, commodities, interest on funding, insurance premiums, guarantees and other income are subject to withholding tax at a rate of 15 %. The Law on Profit Tax of Legal Persons provides that Lithuanian and foreign companies are subject to withholding tax at a rate of 29 % on dividends generated from Lithuanian companies. In case the International Treaty for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with an appropriate country provides otherwise than set out in domestic regulations, provisions of the treaty concerned must govern. Personal taxation The Provisional Law on Income Tax of Natural Persons adopted on 5 October 1990 provides for the system of taxation of individuals as well as partnerships and sole proprietorships. The following individuals are considered as tax residents of Lithuania: any individual whose main place of residence is within Lithuania. In legal terms, the main place of residence is considered to be the place where the individual lives permanently or most of the time, or the place of the individual s personal, social or economic interests; or any individual who has stayed within Lithuania permanently or with breaks for 183 days or more within the period of twelve months, for which taxes are charged. Individuals who are tax residents of Lithuania, whether Lithuanian or foreign, are generally subject to personal income tax on their worldwide income, while individuals who are not tax residents of Lithuania (non-residents) are subject to tax on their Lithuanian-source income only. Employment income generated at the principal job in Lithuanian entities is subject to personal income tax at a rate of 33 %, after subtraction from it of the tax allowance, i.e. the so-called tax-exempt minimum, which presently comprises 214 Lt. Increased tax-allowance is applied to certain groups of individuals. Income earned at the second job is subject to taxation as follows: if income comprises from 0 to 0.5 of the tax allowance, the income tax is 10 %;

17 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 15 if income comprises from 0.5 to 1 tax allowance, the income tax is 20 %; and if income exceeds 1 tax allowance, the income tax is 35 %. Income derived from employment in a foreign entity is treated as miscellaneous income/receipts for tax purposes and the same rules that are applied to taxation of miscellaneous receipts are applicable to this income. Personal income tax at a rate of 20 % is levied on foreign employment income. Royalties paid to authors and their lineal descendants for works of science, literature, art, discoveries and inventions as well as for other individual works are subject to taxation at a rate of 13 %. Gross income generated from the rent of property and other receipts, that may not be attributed to the following: a) employment income generated from Lithuanian entities; b) royalties paid to authors and their descendants for works of science, literature, art and other individual works; and c) income derived from commercial activity registered in the established manner, are subject to the personal income tax at a rate of 20 %. A 24 % income tax is imposed on taxable income of sole proprietorships and partnerships, which is not used for capital reinvestment. Capital reinvestment in an enterprise is calculated in the same way as for companies as explained above. Income tax at a rate of 29 % is levied on dividends generated by individuals. Individuals engaged in a limited number of activities specified by the Government are allowed or required to obtain a license, i.e. permission to perform a certain activity for a fixed period of time, rather than pay income tax. Partnerships and sole proprietorships are generally entitled to the same tax concessions as companies. Corporate profit tax relief The Law on Profit Tax of Legal Persons determines that a 15 % profit tax rate is applied to all companies whose gross income during the taxable period is less than 1 million Lt and whose number of employees does not exceed 50. However, this tax relief does not apply to companies engaged in the sale of alcoholic beverages and tobacco products, as well as wholesale and retail sales of oil products. In the same manner, the Provisional Law on Income Tax of Natural Persons determines that income received by partnerships or sole proprietorships (excluding those engaged in trade in alcoholic beverages, tobacco and oil products, or rendering public catering services or selling alcohol beverages and tobacco products) whose total revenue during the tax period does not exceed 1 million Lt and whose average number of employees does not exceed 50 persons, is subject to a 15 % tax. In addition, specific tax incentives are introduced by the Law on Profit Tax of Legal Persons and Provisional Law on Income Tax of Natural Persons for credit unions, agricultural enterprises, enterprises employing disabled persons and investment funds.

18 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 16 Incentives for foreign investments There is currently no Lithuanian legislation establishing special incentives for foreign investments, although some significant tax incentives still apply to foreign investments that were made in Besides, the Law on Tax Administration provided that if no less than 200 million Lt is invested in a Lithuanian-registered company in the course of 36 calendar months after 1 October 1998, upon the request of the investor, the Lithuanian Government has to conclude an investment agreement with the investor, which should state that the rates of direct taxes effective at the time of investment and paid by the company will not be increased for a period of five years from the date of investment. However, the said incentive was abolished just recently, i.e. on 26 June Incentives for investments in Free Economic Zones The Law on the Principals of Free Economic Zones establishes the procedure and terms and conditions of the establishment, operation and liquidation of free economic zones in Lithuania as well as the legal status and numerous financial incentives of enterprises operating in the free economic zones. These incentives include: 1. corporate tax reduction (see below); 2. no customs duties; 3. no VAT and excise taxes; 4. no real property and road taxes; 5. no taxes on dividends; % discount on land lease taxes; and 7. the share of the profit (income) of an enterprise that is used for the acquisition of required fixed assets, research, introduction of new technology, and investment in the free economic zone is not subject to taxation. Pursuant to the Law on the Principals of Free Economic Zones, an enterprise operating in the free economic zone pays a 80 % lower profit (income) tax for 5 years from the day of its registration and a 50 % corporate tax reduction is applicable for the following 5 years. Furthermore, if a foreign investor (investors) acquires at least 30 % of the authorized capital of an enterprise which is registered and operating in the free economic zone and invests capital of foreign origin in the amount of no less than 1 million USD, the enterprise is exempted from profit (income) tax for 5 years from the day of its registration and a 50 % corporate tax reduction is applicable for the subsequent 10 years. However, it is noteworthy that the Law on Tax Administration stipulates that the tax incentives provided by relevant tax laws are applicable to the enterprises operating within free economic zones to the extent that the provisions of the Law on Monitoring of State Aid to Undertakings are complied with. There are currently two free economic zones in the cities of Kaunas and Klaipėda. Special investment incentives

19 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 17 The Law on Investments establishes some other incentives for investments. Accordingly, a certain portion of interest on loans taken for the purpose of investment financing may be paid with the resources of target-oriented state (municipal) funds. The procedure and terms and conditions of payment of interest are determined by the regulations of the funds. Lithuanian and foreign creditors who have granted loans for funding the carrying out of investment projects may be given state (municipality) guarantees in accordance with the procedure established by the Lithuanian legislation. Furthermore, loans intended for carrying out of investment projects may be insured with public funds in accordance with the procedure established by the Lithuanian Government. As concerns investments into municipal infrastructure, manufacture and services, the municipality, according to the Law on Investments, is entitled to enter into investment contracts which meet the criteria established by the council of the municipality. Special investment, business and land plot selection conditions may be established in accordance with the competence of the municipality. Financial sector of Lithuania There are 12 main banks in Lithuania. The table presents comprehensive information about bank assets, capital stock, deposits and net audited profit in No Bank Asset mill Lt Stock capital mill Lt Loans mill Lt Deposits, mill Lt Net audited profit mill Lt 1 Vilnius bank, AB Lithuanian Saving bank 3 Lithuanian agriculture bank 4 Snoras bank, AB Economy bank (Ukio) Hans bank Kredyt Bank S.A Vilnius Branch 8 Siauliu bank, AB Sampo Bank, UAB Parex bank, AB Merita Bank Plc Vilnius Branch 12 Medicine Bank, UAB Main sources of Bank s for lending The main sources of Bank s finances for lending are internal private deposits. Besides, internal sources of foreign banks and funds are active in Lithuanian banking sector. E.g., Siauliu Bank uses credit lines of the World Bank, PHARE Programme. New financial opportunities are afforded by financing agreement, signed with EBRD, concerning loan for medium and small size business. Lithuanian Agriculture Bank uses means of Privatization Fund. Medium and

20 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 18 small size business have more and more possibilities to start or continue activities by attracting means from risk capital. For this purpose banks create Risk capital governing or investment governing undertakings. At the moment there are not many such undertakings in Lithuania. First time in Lithuania (1997 year) such kind of stock company was created by Vilnius Bank Vilnius Bank Risk Capital Governing (VBRCG). It invests share capital into new starting companies. In this way VBRCG gives means for companies. The principle of VBRCG is to lend term of investments 3-7 years. Dividends are not taken. When the term expires, VBRCG sells part of shares for another investor. From 1995 some foreign funds are active in Lithuania. Finnish Baltcap Management governs Baltic Investment Fund (BIF) 45 mill EUR. BIF invests 1-6 mill EUR. According medium and small size undertakings program BIF can invest to 1 mill EUR. The business plan is necessary. Besides this fund there are some other foreign funds, which invest into Lithuanian business Baltic Republic Fund, Baltic Post-privatization Fund (100% possessed by EBRD), Baltic Small Equity Fund (invests to 400 thousand USD) and others. Background of support DH projects from state budget Special Programme for implementation of Energy Saving Measures In 1996 Government of Lithuania established the Energy Conservation Fund. In 2000 it was transformed to the Special Programme for Implementation of Energy saving Measures. This Fund (Programme) is established for financing programs of energy conservation and its effective utilization and for implementation, operation and development of utilization means of local, renewable and by product energy resources. The Fund holder is the Ministry of Finances and manager - the Ministry of Economy. The main Fund resources include: repaid loans resources allocated from state budget interest obtained for the credits granted from the Fund assistance international institutions and personal contribution The Fund resources are used for granting loans to finance programmes and projects dealing with energy conservation and effectiveness, for introduction, operation and development of utilization means of local, renewable and byproduct energy resources. The loans are extended from the Fund resources by commercial banks on their own risk with approval of the Fund Council: reduction of energy intensity in industry reduction of imported energy sources financing ratio for saving of primary energy unit, i.e. maximum invested amount to save primary energy unit At present the Funds is not operating due to not sufficient financing. The Housing and Urban Development Foundation The Housing and Urban Development Foundation is an agency, established by the Lithuanian Ministry of Finance which seeks to ensure sustainable financing for municipal infrastructure development, housing and energy efficiency improvement projects. The Foundation facilities and supports market

21 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 19 development in Lithuania with an ultimate objective to establish sustainable market based systems. The foundation facilitates and supports market development in Lithuania with an ultimate objective to establish sustainable market systems. Activities of the Foundation include: administers the provisions of loans to municipalities, homeowners associations and individual homeowners for the implementation of investments projects in environmental, district heating, water supply and wastewater treatment, solid waste management, transport infrastructure, energy efficiency and other sectors; provides support in project preparation, identification of financial sources, appraisal of projects viability, tendering procedures, evaluation of project implementation and capacity building; assists Lithuanian governmental or municipal institutions in establishing sound policies and promoting sustainable urban development supports municipalities in project approval process. Lithuanian environmental investment fund The Lithuanian Environmental Investment Fund (LEIF) was founded in the founder of LEIF is the Ministry of Environment. The main goal of the LEIF is to support public and private sectors in realization of environmental projects and projects to reduce the negative impact of economic activities on environment in compliance with the Environmental Strategy of the Republic of Lithuania. The Fund supports investment projects in the form of grants, interest subsidies and loans on soft terms. The extension of LEIF loans for financing investment projects is made through commercial banks, which are obliged to co-finance the as well as assume the risk for non-repayment of a loan. The Supervisory Board of the Fund establishes on annual basis, which type of applicants and which field of environmental investments shall be granted the aforementioned types of financing. Only the projects ensuring the sustainability of environmental effect are supported. The main source of the LEIF is 20 per cent of the pollution tax paid the LEIF since the year 2000 on the basis of the Law on Environmental Pollution Tax. Phare capital grant is another important financial resource of the Fund. (Source: Lithuanian Environmental Investment Fund) Support Programme of Environmental Protection of Lithuania The Programme provides financial support for: measures used restoring harm made for environment, building of environmental objects, elimination of pollution resources; scientific research, evaluation and monitoring of environment; procurement of state companies and organizations with necessary equipment and materials for carrying out environmental activities;

22 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 20 awareness raising, information activities implementation of international projects in the environmental field Finances of the programme are received from following resources: penalties for violation of environmental lows and other normative documentation, penalties for emitted excess amount of pollutants, international organizations support, ect. Municipal funds for environmental protection The main goal of these funds is to finance environmental protection measures implemented by municipalities. The main sources of the funds are pollution taxes, voluntary contribution from persons and organizations. About 70% of the funds means are used for financing measures, which are used restoring harm, made for environment, about 20% - for health care and 10% - for other means. National Energy Efficiency Programme The programme was approved by Government of Lithuania in 1992 and revised in 1996 and in The main five priority directions for its implementation are determined as: 1. Preparation of normative-technical documents necessary for promoting energy efficiency and implementation of the Programme. 2. Renovation of existing buildings, modernization of energy economy. 3. Utilization of indigenous secondary and renewable energy sources. 4. Increase of energy efficiency in production processes. 5. Awareness raising, information, consultation activities (preparation of documents, information activities, ect.). 2.3 Human Resource Development Needs In Lithuania, there is a lack of training opportunities for personal in the energy sector in general and in the DH sector in particular. Lithuanian sector is developing towards market orientation, as a result focusing on customers needs. Largest DH utilities, rented by foreign energy companies, have been able to ensure quite sufficient in-service training of personal. Small and medium size utilities do not have capacities for providing in service training for their staff. In Lithuania exist several organizations working in this field of activity. Lithuanian Energy Institute, Energy Efficiency Center of SC Energy Agency, Association of energy consultants, Lithuanian District Heating Association and other. Up to now, some training courses have been arranged in the framework of the Danish assistance programme (together with Lithuanian District Heating Association). At present, the preparation of the new phase, focused on smaller utilities, is in progress. Still, the effect of training courses is modest, if there are no requirements for regular passing of training courses for staff of boiler plants. Therefore,

23 WP 1 Development of CEED DH Systems Phase 1 DH Sector Level 21 information on this type of requirements in other countries, in particular in EU Member States, is needed. On basis of this information and experience the compatible with other countries and suitable for Lithuanian circumstances obligatory training system could be elaborated and introduced. Regarding project cycle management, there seems to be no great problems as the relevant know-how and expertise are available: in case of large DH utilities in utilities themselves, for smaller utilities these services can be purchased from consulting companies. The problem is that the latter option may be quite expensive. Quite often there is a lack of wider views to new project in its identification phase, i.e. more integration of different aspects (energy, environment, regional, social, technical, ect.) would be reasonable. It should be also mentioned that often there has been drawn not enough attention to the follow-up phase (evaluation of results and monitoring of later operation) of the project. These aspects must be kept in mind while planning training activities for project management. 2.4 Needed Tools for DH/CHP Sector Development (Outlook for Phase 2) The practice of local planning of heat supply (including zoning issues) in other countries would be good to know in general and learn about pros and cons of it. The methods and practice of benchmarking of DH utilities, e.g. set of indicators to be used, etc., should be interesting not only for DH utilities but also for municipalities. The experience of implementation small scale CHP using gas or the biomass (the main Lithuanian local fuel sources) would be very interesting for Lithuanian authorities and customers. Regarding new Lithuanian Heat Law the metering of space heating, the methods of splitting metered heat for consumers in large dwelling houses by apartments, is big problem for DH companies and consumers. The experience of other EU countries in this field would be very useful.