REEEP

Financing Municipal Energy Efficiency in the Commonwealth of Independent States

Moscow, 15.01.2007 - Olga Chistyakova

The Stern Review Report on the Economics of Climate Change demonstrates that the world does not need to choose between averting climate change and promoting growth and development. On the contrary, tackling climate change is the pro-growth strategy for the longer term, and it can be done in a way that does not cap the aspirations for growth of rich or poor countries. Energy efficiency is a well-established option to decouple economic growth from the increase in energy consumption and thus reduce greenhouse gas (GHG) emissions by cutting the amount of energy required for a particular amount of end-use energy service. Energy saving is one of the quickest, most effective and cost-efficient ways to reduce not only GHG emissions, but also to improve air quality.

Despite the enormous potential for cost-effective energy savings, investment in energy efficiency (EE) has been slow in the Commonwealth of Independent States (CIS) due to policy barriers, lack of awareness, and weak economic incentives or inappropriate economic signals. Apart from being a sound part of the environmental and climate change agenda, increased energy efficiency can contribute to meeting widely accepted goals of energy policy such as improved security of supply in countries with scarce indigenous energy resources, economic efficiency and increased business performance in an increasingly competitive global economy.

As local governments in CIS are acquiring more statutory tasks and gaining fiscal autonomy, they become more accountable for the provision of utility services and there is a growing demand for information on the methods and replicable practices for improving municipal services with limited budgets. To address this need, Washington, DC based NGO, the Alliance to Save Energy conducted an international forum on Financing Municipal Energy Efficiency in the CIS.

The forum, funded by the Renewable Energy and Energy Efficiency Partnership (REEEP) took place in Moscow with participants from more than 11 countries throughout the CIS, Western Europe, and the United States.  Participants included organizations and companies such as “Center-Invest” Bank from the Russian Federation, EnEffect Consult from Bulgaria, International Finance Corporation, Nordic Environment Finance Corporation (NEFCO), United Nations Economic Commission for Europe (UNECE), USAID, as well as local and national governments of Armenia, Moldova, and Ukraine.

The forum’s target audience was local governments and local financing institutions that can work together to take advantage of the financial and social benefits of projects that improve energy efficiency in heating, public lighting, water supply and wastewater treatment. The financial benefits of energy efficiency retrofits in municipal infrastructure include lower energy costs and energy security. The ancillary benefits of energy efficiency projects can actualize in higher disposable incomes from lower utility bills, increased indoor comfort, fewer illnesses and reduced CO₂ emissions. REEEP seeks to promote these social benefits through its strategic objectives of accelerated development and deployment of renewable energy technologies and increased efficiency in energy use.

To realise its objectives, REEEP’s work is organised within two major themes. First, to ensure that government policies and regulation encourage the integration of renewable energy sources into energy supply portfolios, promote the efficient end-use use of energy, and create a favourable climate for investment in the sustainable energy sector. Second, to attract a wider cross section of investors into emerging sustainable energy markets and the rapidly evolving carbon market.

According to financial experts at the forum, there is no lack of funds for energy efficiency in the CIS.  However, legal hurdles, bureaucratic red tape, difficulties in obtaining loans, lack of understanding of existing financing mechanisms often prevent project initiators from accessing available funding. There are many ideas for energy efficiency retrofits and the region certainly has the technical expertise for project implementation.

However, these ideas remain untapped because the municipalities do not possess the expertise that is required to transform ideas into concrete bankable projects. Svetlana Frenova, REEEP’s Regional Manager for Russia and the Former Soviet Union pointed out that barriers to implementing energy efficiency in the region are due to absence of an institutional ownership structure, high upfront costs of investment, and limited access to appropriate information.

In order to lower the barriers to energy efficiency in the region, REEEP is funding a research and awareness-raising project implemented by the Alliance to Save Energy on the existing and potential mechanisms for financing municipal energy efficiency projects in the CIS. The knowledge and experience shared at the forum will be presented in a guidebook and case studies that can be used as a starting point for local governments, NGOs, consultants and utilities who are looking for answers on how to obtain financing for their project ideas.

During the two-day forum the Alliance and speakers worked directly with local stakeholders, such as the Moldovan, Armenia, and Ukrainian city mayors and representatives of Ministries. Local government officials learned about the features and benefits of energy efficiency financing mechanisms such as vendor credit, loans, leases, and performance contracting. Examples of successful implementation of energy efficiency financing schemes underscored the need for policy change and better accountability at the local level, stating that political leadership is critical to attracting international financing and later to establishing local financing mechanisms that can be self-sustaining in the future.

In a presentation about the existing municipal energy efficiency financing mechanisms in Russia and the barriers to using them, Vasily Vysokov, President of “Center-Invest” Bank in Rostov-on-Don, said that “problems slowing down the acceleration of the energy efficiency market are low energy prices, insufficient metering, tariff regulation based on expense levels, and delay in reforming municipal enterprises.” Mr. Vysokov called for increased transparency in the Russian banking system in order to ensure support of international partners that can help develop a sustainable locally-driven investment climate in municipal energy efficiency.

The forum participants examined the existing attitudes and financing mechanisms related to municipal energy efficiency projects in the CIS as well as in Hungary, Latvia, and Lithuania, and there are some encouraging findings. For example, NEFCO has successful stories to tell in establishing a revolving fund (a fund that accumulates savings from the savings reaped as a result of energy efficiency retrofits, and reinvests the money into further energy efficiency improvements within the appointed jurisdictions; thus  the fund continues to grow in a self-sustaining manner, increasing the scope of projects it can finance) and implementing projects in schools, kindergartens, hospitals and other municipal buildings in Karelia, Russia.

NEFCO helps secure, if not provide, 50% of the financing while it requires that the other 50% is provided by the beneficiary municipality. In 2002, NEFCO launched a revolving energy efficiency fund in the city of Petrozavodsk that accumulates savings from energy efficiency projects consisting of meter installations, upgrading of sub-central heat stations in schools, combined with insulation of windows in municipal buildings and schools.

Since 2002, NEFCO facilitated investment of US $446,800 from various sources, including the Global Environment Facility and the Petrozavodsk municipality. In 2005 the revolving fund had accumulated US $141,900 that will be used for new energy saving projects. With 31% of the investments returned in less than three years, it seems that financing of this sort is an accessible and viable option for the investor and the municipality alike. However, Elisabet Paulig-Tonnes, Senior Manager at NEFCO, pointed out that “a lot depends on the mayors.” Therefore, the use of simple financing mechanisms such as the revolving funds requires not only availability of financing, but also local political will, initiative, and transparency.

The benefits offered by other financing instruments, such as bank loans and energy performance contracting, have also been discussed. Energy performance contracting – contractual arrangement under which an Energy Service Company (ESCO) implements an energy efficiency or renewable energy project and uses the stream of income from the cost savings, or the renewable energy produced, to repay the costs of the project, including the costs of the investment offers means to deliver infrastructure improvements to facilities that lack energy engineering skills, manpower or management time, capital funding, understanding of project risk or technology information.

To this end financing, and the education of financial people about the specifics of energy efficiency projects, are critical needs in most countries. An ESCO industry cannot develop or sustain itself without local financing. Concerted efforts to educate bankers and financiers must become a major priority, to all who wish to foster the commercial provision of energy services in the municipal sector and beyond.

Overall, the forum called for several recommendations that can serve to stimulate the development and adoption of financing mechanisms on the local level:

• Harmonization of fiscal and energy efficient legislation;
• Increase in transparency & accountability of the financial sector, and energy management schemes;
• Creation of municipal energy management programs;
• Development and proper implementation of robust EE standards and building codes;
• Improvement of the local investment climate to attract private direct investments in the municipal energy sector;
• Creation of a unified data bank that would contain financing mechanisms and experiences, and would stimulate replication.

The Alliance to Save Energy sees that in order to promote and broaden the above-mentioned recommendations local ‘champions’ should be distinguished and utilized as showcase example to encourage replication and sustainability of municipal energy efficiency financing. It seems that similar forums hold the key to fostering an ongoing dialogue and generating an exchange of ideas that can in turn foster to maturity the proposed recommendations.