Coming in from the cold – the need for reform in district heating

November 25, 2013

Abdoulaye Seck, World Bank Country Manager for Moldova

The beginning of winter prompts us to consider the topic of district heating in Chisinau. Termocom, Chisinau’s district heating company, have had financial issues for the last 20 years, accumulating US$138 million of debt to Moldovagaz. This debt led to Moldova’s gas supplies being cut off during the 2008-2009 heating season, illustrating Moldova’s lack of energy security and demonstrating how one district heating company can cause problems for the whole economy.

Termocom has been unable to afford the maintenance and rehabilitation work that is needed. As a result, the heating network is deteriorating and Chisinau experiences network breakages 10 times more often than the more modern district heating systems in Europe. If investments are not made to rehabilitate the heating network, the chances of a critical breakage in the system and disrupted heating services will be very high. And after years of going through a restructuring process, Termocom is required to be liquidated at the end of the year – which may lead to severe disruptions in its operations.

Sweden has financed expert studies on strategic heating options for Moldova as early as 2001, and the World Bank in 2009 initiated efforts to identify potential solutions to this problem. The conclusions of recent studies, financed by Sweden, who remains the leading bilateral donor to Moldova’s energy sector, were presented to a Working Group made up of Government, Municipality and related agencies. They note that it would be most efficient to merge the generation and distribution of heating (Termocom, CHP-1 and CHP-2). Operating the entire system as one would allow the new entity to maximize the efficiency of the heating and power system. Merging would also consolidate debt that is currently spread among three corporate entities and facilitate debt restructuring.

This is a 20-year old problem and we recognize that there are no easy solutions. Ensuring that a new company does not face the same problems as Termocom will require major decisions – about corporate and debt restructuring, managing substantial debt repayment obligations, and closing the 60-year-old CHP-1 plant that has been operating well past its designed lifetime.

The World Bank Group engagement in Moldova’s energy sector is intended to help secure the affordable, reliable, and sustainable energy supply needed to end extreme poverty and promote shared prosperity. With this in mind and in response to a request from the Government of Moldova, the World Bank has prepared a US$40 million investment to ensure continued heating services, increase the efficiency of the district heating system, and mitigate the impacts of the recommended restructuring. The feasibility study, funded by Sweden, indicates that about US$8 million of benefits per year can be expected from the proposed US$40 million investments. Staff impacted by the restructuring will be provided with training opportunities and financial assistance. Additionally, a World Bank Guarantee of US$80 million is planned to help Moldova restructure and refinance the debt stock on favorable terms, helping to lower the future risk of gas supply disruptions.

Chisinau’s problems with district heating, while being both a bottleneck to developing the energy sector and a detriment to the investment climate, also pose a threat to the health and welfare of the most vulnerable households. There are an estimated 160,000 residents of Chisinau who have no alternative source of heating; for these people any disruption in heating service can have serious consequences during cold seasons.

The World Bank Group, Sweden and other development partners would like to help. But before this project can be realized, a political decision to implement the new restructuring process is needed. Last week’s cabinet decision to implement the restructuring plan was a welcome development. We hope that the Municipal Council will also join in the effort to ensure heating services for Chisinau residents and improve Moldova’s energy security.

H.E. Ingrid Tersman, Ambassador of Sweden to Moldova

Mr. Abdoulaye Seck, World Bank Country Manager for Moldova