U.S. developers in increasing numbers are warming up to a system of heating and cooling commercial buildings long used in Canada and Europe.

District energy, which heats or cools a group of buildings from a central source, has become fairly common among entities such as universities, military bases and hospitals, which heat buildings from a central plant. But in recent years, the idea has been applied to buildings without common ownership, such as downtown business districts or clusters of properties such as the Aladdin Hotel complex in Las Vegas and the Bank One Ballpark district in Phoenix.

Developers are drawn to the concept because it eliminates initial equipment costs, saves building space, decreases monthly energy costs and is more environmentally friendly.

District energy, in fact, is becoming a key factor in real estate development, according to Jay Berlinsky, an attorney with Schwartz, Cooper, Greenberger & Krauss, a Chicago law firm with a substantial real estate practice whose clients include developers of district energy systems.

"If developers are informed about the availability of district energy, there's no question it's considered as an option," says Berlinsky. "Outsourcing in general is becoming more popular, especially as district energy proves its reliability."

District energy is defined as the generation and distribution from a central source of thermal energy - generally in the form of hot and chilled water or steam - to various customers for heating, cooling, domestic hot water generation, or use in industrial processes, according to Palo Alto, Calif.-based EPRI, an international nonprofit organization established as the Electric Power Research Institute in 1973 during the energy crisis.

District energy, which works best in areas with high building density, can be an enticement to attract downtown development because investors have to spend less upfront, says Anders Rydaker, president of District Energy St. Paul, who brought his expertise from Sweden in 1993 to join the St. Paul project, which now has the largest hot water district heating system in North America.

"District energy reduces the development costs of new buildings because it takes all the capital costs associated with chillers and boilers out of the building design," says Rydaker.

In addition to saving on expensive capital expenditures, building space and monthly utility costs, district energy also relieves building owners of other responsibilities. The cost of managing and operating these systems is not within the expertise or desires of most real estate developers and operators, notes Berlinsky.

"They want to run buildings and lease space," he says. "They don't want to manage energy systems."

Chicago-based Unicom Thermal Technologies, which began laying pipes under the streets in Chicago's downtown business district about six years ago, estimates it has saved its customers $70 million in capital cooling equipment costs. Unicom constructed and operates a chilled water system that provides cooling for 35 million sq. ft. of real estate in 65 buildings with different owners in downtown Chicago.

"One of the most attractive benefits is to help owners and operators focus their investments on their primary business function and avoid major financing for utility plants and the associated equipment," says Scott Blumeyer, vice president and general manager of Unicom Thermal.

Unicom built several plants in Chicago to make chilled water and ice that are connected to customer buildings via a system of pipes. The plants make ice at night during off-peak electricity hours, store the ice and pump water through it during the day. The chilled water passes through a heat exchanger and the resulting thermal cooling is used to create air conditioning.

Who owns the plants? Unicom Thermal is a subsidiary of Unicom Corp., which also owns Commonwealth Edison. While district energy plants are often operated by government corporations in Canada and Europe, in this country they usually are owned by private companies, often unregulated subsidiaries of utilities, or a partnership between municipalities or investors and a local utility.

District Energy St. Paul, however, is operated as a private nonprofit corporation.

"What's unique in St. Paul is the way we are structured," Rydaker says. "It's not a very common business structure."

That arrangement allows any unexpected savings to be passed along to customers. "We set a rate that we charge for the coming year," he says. "If we're doing better than that, the difference goes back to customers."

Since District Energy St. Paul began serving its first heating customer in 1983, downtown St. Paul not only has reduced energy consumption but sharply decreased pollutants. The efficiency of the hot water district system is double that of the city's former steam system, says Rydaker. It also eliminates the need for individual on-site boilers, which require constant maintenance to ensure they are operating at peak efficiency.

St. Paul's office, retail and industrial customers include new buildings on the city's skyline, such as the Science Museum of Minnesota, the Minnesota Life office tower and the Minnesota Wild hockey arena.

St. Paul introduced its district energy heating system in 1983 and its cooling system a decade later in 1993. Cogeneration, the simultaneous production of heat and electricity, was added in 1990.

The company's 450 customers represent 75% of the downtown market on the heating side, and 50% of the downtown cooling market. Though impractical for individual residences, district energy can be used efficiently for multifamily projects, such as the 300 downtown townhomes served by District Energy St. Paul, says Rydaker.

The company's customers are served via a closed-loop network of super-insulated pipes which carry hot and chilled water from a central plant to large and small buildings, eliminating the need for those buildings to operate their own boilers and air conditioners.

Cooling customers range in size from 33,000 sq. ft. to more than 600,000 sq. ft. The city's 14,500 feet of chilled water pipeline circulate 405,000 gallons of water. The eight chillers and storage tank, which stores chilled water produced at night using off-peak electricity for daytime distribution, currently serve more than 8 million sq. ft. of building space, but was designed to double its capacity in the next 15 years.

St. Paul's $30 million cooling system was funded by revenue bonds plus a loan from the St. Paul Housing and Redevelopment Authority Deregulation's impact Users of district energy are expected to benefit even more as states deregulate their electric utilities. Because peak energy may become more expensive, district energy will have the ability to "flatten" the energy load by storing energy to be used during more expensive periods.

By reducing electric power consumption during peak periods, businesses can flatten their building's load profile to give it better pricing, according to Berlinsky.

"The systems that rely on ice production should have a distinct advantage because they reduce load and lower energy costs," says Berlinsky. "This scenario will only get better as deregulation of electricity spreads and more buildings will be able to purchase power in a competitive environment."

To produce district energy, companies and utilities often team up, a scenario that will become more common during deregulation. "Utilities already have relationships with these customers, so a partnership with the local utility makes sense," says Berlinsky.

In Las Vegas, Unicom teamed up with Nevada Power to serve the new Aladdin hotel, casino, restaurant and shopping complex. The heating and cooling plant has been completed and is providing energy to finish the construction project, which will include three hotel towers, a casino and shopping center. The former Aladdin Hotel was demolished two years ago; the new complex will open this summer.

"While this plant has some capacity to support other customers, it is being built to serve only the Aladdin complex," says Berlinsky. The Aladdin system will provide energy to 1 million sq. ft. of multiple users in the complex.

District energy is especially beneficial to multi-use projects with nontraditional operating hours such as those in Las Vegas, which are round-the-clock, according to Berlinsky.

"For these kinds of mixed-used projects, the efficiency of the system is very critical," he says.

In Phoenix, energy demands can be shifted and shared between the new enclosed Bank One Ballpark during nights and weekends, and with surrounding offices during weekdays. Unicom's other district energy projects include Windsor Casino in Windsor, Ontario, and Midway Airport in Chicago. The Windsor system also has been designed to serve other customers in its area, says Berlinsky.

District Energy St. Paul is continuing to look toward the future and an Earth Day goal where at least one-third of the nation's energy will be produced from renewable sources by 2020. Its affiliate, Market Street Energy Co. LLC, together with Trigen-Cinergy Solutions LLC, has just finalized plans to construct a new combined heat and power plant that will burn wood waste as fuel to heat buildings in downtown St. Paul.

The wood-fired cogeneration project will offset electric production at coal-fired power plants, resulting in improved air quality, according to Rydaker. Sulfur dioxide and particulate emissions, which contribute to acid rain, will be reduced by 600 tons per year with the new system. Carbon dioxide, the main factor in global warming, will be reduced by 280,000 tons per year. The project will be financed entirely by private investment and will be online by late 2002. It will be the largest biomass-fired district energy system in the country.

"Our industry is changing rapidly thanks to technology and deregulation," says Rydaker. "Our core mission is to develop and provide cost-effective energy solutions that improve our environment."