Financing Energy Efficiency in the Western Balkans Public ... · Economy/Energy, which have responsibility for development and implementation of the NEEAPs, and their line ministry

A

Public financing options for NEEAPs “Food for Thought” Paper

Financing Energy Efficiency in the Western Balkans

July 2013

Policy and Strategy Discussions

B

This publication has been produced with the assistance of the European Union. The content of this publication is the sole responsibility of the Consortium led by PM Group and can in no way be taken to reflect the views of the European Union.

This paper has been prepared by Helene Ryding, Senior Expert, IFI Coordination Office and Andreas Seeliger, Professor of Economics, Baden-Wuerttemberg Cooperative State University Mosbach, with contributions from Claire Chretien, Assistant Coordinator, IFI Coordination Office.

IFI Coordination Office1 Rue de Ligne, 1000 Brussels, Belgium – 00 32 2 227 6085 – [email protected] – www.wbif.eu

Contents1. ExECuTivE Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2. SCoPE oF work and STruCTurE oF ThiS rEPorT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2.1. Scope of work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

2.2. Structure of the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

3. ovErviEw oF mEChaniSmS For EnErgy EFFiCiEnCy in gEnEral uSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

3.1. mechanisms for energy efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

3.2. mechanisms used in Eu member states . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

3.3. mechanisms common in the western Balkans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

4. FramEwork For EnErgy-EFFiCiEnCy mEaSurES in ThE wESTErn BalkanS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

4.1. Current energy-efficiency commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

4.2. role of governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

4.3. general financing choices for governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

4.4. options for improving the delivery of funds for EE in the western Balkans . . . . . . . . . . . . . . . . . . . . . . . . 23

5. modES oF FinanCing To gEnEraTE FundS For nEEaP imPlEmEnTaTion . . . . . . . . . . . . . . . . . . . . . . . . . . 25

5.1. Financial mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

5.2. Fiscal mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

6. dElivEry mEChaniSmS To imProvE ThE uTiliSaTion oF FundS For EE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

6.1. Technical assistance for project identification and preparation for loans . . . . . . . . . . . . . . . . . . . . . . . . . . 33

6.2. Creating a market for energy services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

6.3. legal obligations for energy suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

6.4. Energy-efficiency funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

6.5. voluntary agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

6.6. non-financial incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

7. PuBliC inSTiTuTionS To PromoTE EnErgy EFFiCiEnCy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

7.1. Energy-efficiency agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

7.2. Public ESCo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

8. kEy iSSuES For govErnmEnTS in dESigning ThE nExT nEEaPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

8.1. Scaling up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

8.2. Typical Packages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

8.3. issues for government as a whole . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

8.4. issues for the private sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

8.5. Public sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

annEx a: Experiences with obligation schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

uk obligation schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Cost efficiency of selected European obligation programmes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

obligations compared to other instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

annEx B: references . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

liST oF TaBlES

Table 1. indicative proposal for annual planning of EE activities over a period of five years . . . . . . . . . . . . . . . . 7

Table 2. overview of mechanisms for promoting energy efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Table 3. Energy efficiency potential by 2020 in the western Balkans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Table 4. growth projections in the western Balkans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Table 5. general government public debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Table 6. overview of the main EE and rE financing facilities in the western Balkans (2013) . . . . . . . . . . . . . . . . . . 26

Table 7. vaT rates in the western Balkans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Table 8. Comparison of legal obligation schemes in four countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Table 9. Financial mechanisms used in Eu member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Table 10. Planning for nEEaP activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Table 11. Savings delivered by end-use sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

liST oF FigurES

Figure 1 The multiple benefits of energy efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Figure 2 Percentages of mechanisms used in Eu member states for EE building measures (indicative) . . . . . . . . . . 12

Figure 3 Projected growth rates for western Balkan countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Figure 4 Projected general government debt % gdP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Figure 5 Energy service agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Figure 6 ESCo relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Figure 7 relationships with legal obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Figure 8 Partnership arrangements for CErT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Figure 9 moving to commercial finance for EE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Figure 10 a typical package of measures to promote energy efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Figure 11 Selected benefits from energy-efficiency measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Figure 12 Suggested measures for industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Figure 13 Suggested measures for single family households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Figure 14 Suggested measures for housing associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Figure 15 Suggested measures for private transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Figure 16 Suggested measures for public sector buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Figure 17 Suggested measures for public services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Figure 18 Suggested measures for public energy utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

gloSSary oF aCronymSCP Contracting Parties (signatories to the Energy Community Treaty)

DG Directorate General (of the European Commission)

EBRD European Bank for Reconstruction and Development

EC European Commission

ECRB Energy Community Regulatory Board

ECS Energy Community Secretariat

ECT Energy Community Treaty

EE Energyefficiency

EECG Energy-EfficiencyCoordinationGroupoftheEnergyCommunitySecretariat

End-borrower A physical or legal person taking a loan from a commercial bank

ESCO EnergyServiceCompany(financialintermediary)

ESPC Energy Saving Performance Contracting

ETS Emissions Trading Scheme

EU European Union

FI Financial Intermediary

IFI International Financial Institution

IFI Co EC-funded project, “Horizontal Support to Coordination with International Financial Institutions in the Western Balkans and Turkey”

IPA InstrumentforPreAccession(financing)

KfW Kreditanstalt für Wiederaufbau

MS Member States

NEEAP NationalEnergyEfficiencyActionPlan

RE Renewable energy

SEAP Sustainable Energy Action Plan

SME Small and Medium Enterprise

TA Technical Assistance

ToR Terms of Reference

UNMIK United National Interim Administration Mission in Kosovo

WBIF Western Balkans Investment Framework

WBPSSF – SEFF Western Balkans Private Sector Sustainable Finance – Window for Energy Financing Facility (previouslyWindowforEnergyEfficiencyFinance)

WeBSEFF Western Balkans Sustainable Energy Financing Facility(WeBSECLF) (previously Western Balkans Sustainable Energy Credit Line Facility)

WeBSEDFF Western Balkans Sustainable Energy Direct Financing Facility

1

1 ExECuTivE SummaryBackground

In 2013 the countries of the Western Balkans as Contracting Parties to the Energy Community Treaty must prepare their Second National Energy Efficiency Action Plans (NEEAPs). Their efforts are being supported by the Energy Community Secretariat (specifically its Coordination Group on Energy Efficiency) and the EC (-DG Enlargement) which is financing technical assistance and capacity building with a focus on financing options for NEEAP implementation.

This report has been prepared by the DG Enlargement-financed IFI Coordination Office to provide “food for thought” for the EE Coordination Group members together with line ministry officials and municipalities’ representatives who participated in a series of in-country inter-ministerial workshops on financing options for implementation of the NEEAPs. These have been undertaken in the first half of 2013 to facilitate the timetable for preparing the second NEEAPs. These workshops were intended to help the Ministries of Economy/Energy, which have responsibility for development and implementation of the NEEAPs, and their line ministry colleagues to develop coherent plans for EE which are fully integrated into national development plans for other sectors of the economy and to assist them in identifying adequate finance for the NEEAPs from internal and external sources. These in-country workshops have been complemented by a special regional workshop for the Ministries of Finance held in Vienna in April 20131.

In line with their commitments under the Energy Community Treaty, all of the Contracting Parties from the Western Balkans have prepared and approved2 a first round of NEEAPs. These plans detailed the activities to be undertaken in the various sectors (the initial focus was mainly on the transposition of EU Directives), with the overall aim of a reduction in energy consumption of 9% between 2010 and 2018. The public sector has been given a leading role by the EU in demonstrating its commitment to meeting these targets. In general, the first NEEAPs as submitted by the Contracting Parties did not provide sufficient detail on how the implementation of these plans will be financed.

This paper and the workshops follow on from an EC-financed study in 2011 (which identified a long list of financing mechanisms used in EU member states and in the Western Balkans) but focuses on a narrower range of options that may be suitable for application in the Western Balkans.

1 Materials from the workshops are available at www.wbif.eu/energy 2 Bosnia and Herzegovina has prepared a first NEEAP, but has not yet approved it.

2

Current constraints on public sector financing in the Western BalkansGiven the challenging macroeconomic situation in the Western Balkans with low growth levels and increasing public debt, governments need to assess carefully the options available to finance measures to increase energy efficiency. A further increase in public debt for funding energy-efficiency measures needs to be weighed up carefully in terms of capacity to borrow and the competition from other sectors for scarce fiscal space. Securing revenue through increased taxes is technically possible. However, an increase of general taxes for this purpose could face political and social opposition. This is not only due to the reduction of household budgets by further taxes but also by undesirable redistribution effects that could occur unless the design of the financing mechanism is carefully chosen. Similarly, significant tax reductions as incentives for the private sector to invest in energy efficiency could be difficult due to the loss of government revenue.

The introduction (or increase or harmonisation) of taxes on energy consumption or other environmental matters (carbon, sulphur, etc.) seems to be more realistic and to have a higher probability of social acceptance. However, this also needs to be handled with care given the precarious financial situation.

Mechanisms considered potentially suitable for the Western BalkansBased on a review of the experiences in EU member states and the situation in the Western Balkans, a number of mechanisms have been identified as potentially suitable for use in the region. These have been grouped in terms of:

• Financial mechanisms – EE activities financed from loans/credit line schemes; or multi-annual budget financing;

• Fiscal mechanisms – EE activities financed and/or stimulated by the use of taxes;

• Delivery mechanisms – EE activities stimulated by the availability of specific assistance or imposition of certain legal obligations;

• Institutions – EE activities developed/managed by public institutions.

The mix in each country will depend on the fiscal space for government borrowing and the policy choices preferred by each government.

The order of the mechanisms does not indicate any preference, but merely the order in which they are discussed in this report:

• Preferential loans (often with grace periods)

• Multi-annual accounting (public finance)

• Credit lines for SMEs and households

• Subsidies (from internal finance) and grants (from external finance)

• Loan guarantee schemes for private banks (external finance)

• Energy price reforms

• TA for project identification and preparation for loans or public procurement

• ESCO market, with performance contracting and third-party financing

• Legal obligations for utilities (with trading certificates)

• Energy-efficiency funds (including revolving funds)

• Voluntaray agreements/ non-financial incentives

Financialmechanisms

• Carbon, energy or environmental taxes

• Tax rebates (VAT, investment incentives)

Fiscalmechanisms

Deliverymechanisms

• Energy-efficiency agencies

• Public ESCOsInstitutions

3

Key issues for governments in identifying financing sources for NEEAP implementation

The benefits of adopting energy-efficiency measures are many and these are summarised in Figure 1 below.

As governments prepare their second NEEAPs, a number of key questions should be considered when determining the most suitable financial sources for implementation. The answers are country-specific and depend on country-specific goals and policies, but the main issues that should be considered include:

There is a wide range of options from which governments can choose to incentivise and promote energy efficiency across the different sectors of their economy. The diagram above summarises the components of any stimulus package for EE but different packages are required for different sectors of the economy. These can be divided into:

• Issues to be considered to stimulate EE in the private sector (industry/SMEs, single family households, housing associations, private transport);

• Issues to be considered to stimulate EE in the public sector (ministries/municipalities with large numbers of buildings, including social housing; public services – transport and street lighting; public utilities – water supply, district heating, electricity distribution).

• Why does EE matter at a national level?

• What is the best way to finance the different measures?

• How much can energy prices rise, and how can energy price controls be removed to send better signals to consumers that they should save energy?

• Should funding be provided at municipal level as well as national level?

• How should targets be set for the different sectors of the economy?

• Should energy prices be subsidised for certain industrial consumers to maintain their competitive position in their export/regional market?

consumer

funds

incentive

stimulus

Figure 1The multiple benefits of energy efficiency

Source: IEA (2012a)

4

The details of various packages are outlined in this report but, in summary, possible stimulus packages for the different sectors include:

1. Industry

2. Single Family Households

Stimulus Finance Incentives

Price rise

Public information

IFIdirectlending

Grants

VAT reductionon selectedproducts

Tax rebates for investments

Technicalassistance

IFI Credit LinesLocal banks

Industry SMEs

IFIs Grants

Stimulus Credit Line Incentives

Price rise

Public information

Labelling

Fuel tax

Loans fromlocal banks

Governmentgrant

VAT reduction on selected products

SingleFamily

Household

(IFIs)

5

3. Housing Associations

4. Private Transport


Price rise

Utility obligation Pay as you save

Public information

Labelling

Government grantfor specific measures

Subsidy forvulnerable customers

Tax rebate

Social security payments

ESCO ?

Housing association

will includevulnerable customers

(IFIs) Grants

IFI loans

Local banks


Fuel price rise / Energy tax

Public information

Credit Lines

Local Banks

VAT reduction on new vehicle

Tax rebate onnew fleets

Privatevehiclefleets

IFIs

6

5. Public Sector Buildings

6. Public Services


Price rise

Public information

NEEAP targets

Reduced budget allocations

Leading role of the public sector

Covenant of mayors

Statebudgetcontribution(budgetcapture)

IFI/EC grants

TechnicalAssistance

Creditlines

Localbanks

ESCO

IFIs

Directborowing

Lineministries

MunicipalitiesBuilding

operators

IFIs Grants



NEEAP targets

Covenant of Mayors

Direct borowing EC grants

Technical assistance


Publictransport

IFIs/EC Grants

7

7. Public Energy Utilities

Particular attention should be paid to the challenges posed by each country’s annual budget planning processes and the appropriate timing of stimulus, investment and incentives in the NEEAPs, since:

• The activities in the NEEAPs will be carried out over several years as programmes of investment in various sectors, and will need budget allocations in advance –see table 1 below;

• Stimulus activities, especially increases in energy prices, need to be announced in advance with publicity campaigns giving information about actions which could be taken, and protective measures available for vulnerable customers;

• Maintaining incentives on a medium/long-term basis is not sustainable and, ideally, incentives to famil-iarise consumers with the financial mechanisms should not be necessary beyond the early stages.


Preassure from GOVas owner to producemore efficiently (targets?)

Legal obligation andtarget for savingby consumers

Regulatiory supervision

Price rise

Subsidies for investments forvulnerable customers

Technical Assistanceby public ESCO

PublicEnergyUtilities

(IFIs) Grants

Barrier removal

Public awareness

Legislation

Training

Arange donnor suport; Allocate Funding from Budget

Full Implementation

ImplementationProjects

Monitoring and verification

Year 1

Identification

Campaign

Draft primary legislation

For campaigns, legal drafting and project preparation

Year 2

Removal by legislation

Campaign

Approve legislation

Planning

Identify funds for following year

Preparation

Year 3

Campaign

Training


Spend budget funds

Implementation

First set of projects

Year 4

Results Campaign

Training


Spend budget funds

Preparation

Year 5

Campaign

Training


Spend budget funds

Implementation

Second set of projects

Years 5-10

Check for other problems and correct

Results Campaign

Identify funds for following years

Spend budget funds

Preparation/implementation

Each set and total results

Table 1 indicative proposal for annual planning of EE activities over a period of five years

8

9

2 SCoPE oF work and STruCTurE oF ThiS rEPorT

The purpose of this report is to provide “food for thought” for members of the Energy Efficiency Coordination Group of the Energy Community Secretariat (ECS) line ministries, municipalities and other relevant organisations involved in the development and implementation of NEEAPs. The report was developed alongside the preparation and delivery of a series of in-country inter-ministerial workshops on financing options for implementation of NEEAPs. These were undertaken in spring 2013 as preparation for development of the second NEEAPs. These workshops were intended to help the Ministries of Economy/Energy, which have responsibility for development and implementation of the NEEAPs, and their line ministry colleagues to develop coherent plans for EE which are fully integrated into national development plans for other sectors of the economy. At the same time, the workshops aimed to assist in identifying adequate finance for the NEEAPs from internal and external sources.

The workshop participants typically included:

• Ministry of Economy/Energy, which has responsibility for implementing and monitoring the NEEAPs;

• Line ministries with significant inventories of public buildings: Health, Education, Defence, Culture, Social Housing;

• Municipalities with responsibility for public services, e.g. transport, water, district heating;

• Municipalities already signatories of the Covenant of Mayors with commitments to develop SEAPs (Sustainable Energy Action Plans) or those wishing to participate in the near future;

• Other relevant institutions, such as energy regulators and energy efficiency fund managers.

A separate regional workshop was held for Ministries of Finance, IFIs and the EC to facilitate focused discussions and sharing of experiences with respect to financing EE commitments.

10

This final version of the report includes feedback from the workshops held in Montenegro, Kosovo*, Bosnia and Herzegovina, Croatia and Serbia and the Ministry of Finance regional workshop in Vienna.

2.1. Scope of work

In line with their commitments under the Energy Community Treaty, all of the Contracting Parties from the Western Balkans have prepared and approved NEEAPs and these have been assessed by the ECS. While these plans detail the activities to be undertaken in the various sectors, in general they do not provide sufficient detail on how the implementation of these plans will be financed.

An array of externally financed financing mechanisms is available in the Western Balkans, mostly through credit lines financed by International Financial Institutions (IFI) and the European Commission (EC). The EC-financed IFI Coordination Office has documented these3 and the information made available to the Contracting Parties. In general, these externally financed mechanisms focus on providing financing for SMEs, and in some cases individual householders, to undertake EE investments. There is mixed take-up of the available financing and, in some Contracting Parties, limited awareness regarding the scale, scope and opportunities available. For this reason the IFI Coordination Office has published in June 2013 an information booklet4 detailing credit line and technical assistance facilities available for EE investments throughout the region. It is hoped that this will help raise awareness of the potentially € 1.5 billion available for this purpose.

In 2011 the European Commission (EC-DG Enlargement) commissioned a study to identify financing mechanisms used in EU MS to promote EE that could be considered by the Western Balkan administrations seek to meet their EE commitments under the Energy Community Treaty. The final report on this study was submitted in October 2011.5

This “food for thought” paper and the subsequent in-country workshops build on this work to (i) identify a small number of mechanisms that could be suitable for implementation in the Western Balkans and (ii) generate better awareness among relevant officials regarding the development and implementation of such mechanisms.

This paper focuses on public sector financing of incentives/actions in the private and public sector, that can supplement/promote existing external financing mechanisms available through IFIs and donors.

2.2. Structure of the report

Section 3 provides a brief overview of financial, fiscal and other types of instruments available to promote energy efficiency. Section 4 tries to identify those instruments that could be suitable for implementation in the Western Balkans, based on the current framework of energy efficiency. In principle, most of the instruments presented in section 3 are effective and suitable to promote energy efficiency, but some constraints due to the institutional and macroeconomic framework need to be considered as they impact on the range of options for the Western Balkans. Specific examples on the use of selected mechanisms in EU member states (MS) are presented in sections 5 to 7. Even if the framework of EU MS cannot be directly compared with the Western Balkans, some helpful lessons can be drawn. The discussion of the given examples includes the objective, financing structure, methodology, key operating requirements and comment on their use/pros and cons. Finally, section 8 raises some of the key issues that arise when discussing the suitability of instruments in the various sectors of the economy. These questions are intended to stimulate discussions in the ECS Task Force for EE as well as to aid the inter-ministerial discussions in the forthcoming workshops and as part of the NEEAP preparations. Annexes contain some additional details on some mechanisms discussed as well as a list of references consulted in the preparation of this report.

* This designation is without prejudice to positions on status, and is in line with UNSCR 1244 and the ICJ Opinion on the Kosovo Declaration of Independence3 Review of Financial Support Facilities Available for Energy Efficiency and Renewable Energy in the Western Balkans, see http://www.wbif.eu/Energy 4 See http://wbif.eu/documents/2755 See Executive Summary of Study on Financing Mechanisms to Implement NEEAPs in the Western Balkans MWH 2011 http://www.energy-community.org/pls/portal/docs/1260177.PDF

11

6 This section provides only a brief overview. Detailed descriptions of the individual mechanisms can be found in MWH (2011), EuroACE (2010) or EC/IE (2010).

3 ovErviEw oF mEChaniSmS For EnErgy EFFiCiEnCy in gEnEral uSE3.1. Mechanisms for energy efficiency6

In principle, a wide set of mechanisms and instruments is available to promote energy efficiency (see table below). They can be classified as financial, fiscal and other (EE) instruments, namely different ways to deliver the funds and promote their use. The instruments include classic financial instruments, such as loans, grants and guarantees, as well as more modern and market-based EE instruments like third-party financing through ESCO contracting and obligation schemes. The latter can be combined with trading of so-called “White Certificates”. New institutions have also been developed to implement national energy efficiency policies.

Fiscal mechanisms include positive incentives like tax reductions or rebates (mainly income tax, VAT) as well as “penalties” for energy consumption, such as energy or CO2 taxes.

Other mechanisms include using energy prices as a steering tool or framework-setting style rules for accounting or public procurement. Some of these mechanisms have to be used in combination with others to become effective.

The aim of all of these mechanisms is to expand the finance available for EE measures, and to utilise the finance more effectively.

12

3.2. Mechanisms used in EU member states

The majority of mechanisms used in both old and new EU MS are the classic instruments of loans and grants (usually combined). Tax incentives also play an important role, but are more or less limited to the old MS. Only a minority of programmes uses more innovative mechanisms and, again, they appear mainly in the old MS. Another structural difference between old and new MS is the source of financing (or the refinancing of the mechanisms). In the old MS, programme costs are usually covered by the state budget, using funds generated from the tax base. In contrast, new MS usually rely on energy-efficiency programmes and incentives developed by international financial institutions and financed through EU structural funds or sponsored by international donors. However, some states (e.g. Hungary and Romania) have established mixed financed (state budget or national fund combined with EU or IFI financing) mechanisms.7 This means that old MS may provide more innovative and more appropriate mechanisms for application in the Western Balkans.












Financialmechanisms



Fiscalmechanisms

Deliverymechanisms



Tax incentives 17%

Loans 30%

TPF/Trading/Others 7%

Grants 46%

Table 2 overview of mechanisms for promoting energy efficiency

Figure 2 Percentages of mechanisms used in Eu member states for EE building measures (indicative)8

7 UK GBC (2011) provides an overview of selected European countries. 8 Source: EuroACE (2010). The study focuses on the building sector and does not claim for completeness, but as more than 80 programmes are covered, the figures could be interpreted as representative. The picture could change if the industry sector and other programmes were included. In this case, a slightly higher share for taxes and modern instruments could be assumed, but the general conclusion would probably remain unchanged.

13

3.3. Mechanisms common in the Western Balkans

As in the new MS, loans and grants (combined with technical assistance) are the main mechanisms used in the Western Balkans. Current research shows that most of the instruments are focused on the industry sector and provided through IFI credit lines with local banks.9

Even where the first round of NEEAPs from the Contracting Parties provide for a wide portfolio of measures, only limited information on costs is given. In particular, information on sources of funding often remains unspecified.10 In principle, there are substantial external financial resources available for the Western Balkans, but in general only limited action has been taken in several sectors and regions. It is not clear whether a higher (volume) increase in external funding would be suitable to reach the sectors not covered so far. In addition to the public sector some sections of the private sector (especially households, housing associations and SMEs as well as transport) need more and different facilities to take sector- and regional-specifics into account.11

{ }[ ]

Meeting the commitments for energy efficiency requires a stronger role for national governments than before. Whereas in the past most of the financing was realised on a bilateral level between IFIs and the private sector (including involvement of local banks), more actions from states are now expected to ensure the exem-plary role of the public sector and to fill the gaps in private sector funding

{ } [ ]


Loans and grants (combined with technical assistance) are

the main mechanisms used in the Western Balkans

9 IFI Co (2011) 10 Energy Community Secretariat (2011) provides an assessment of all Western Balkan NEEAPs.11 IFI Co (2011), Energy Community Secretariat (2011)

14

15

4 FramEwork For EnErgy-EFFiCiEnCy mEaSurES in ThE wESTErn BalkanS4.1. Current energy-efficiency commitments

The Energy Community Treaty commits the Contracting Parties to implement the following EU Directives, with time frames that have been adjusted to reflect the fact that the commitment was made only in December 2009:

• Directive 2006/32/EC on energy end-use efficiency and energy services;

• Directive 2010/31/EU on the energy performance of buildings, recasting and repealing Directive 2002/91/EC;

• Directive 2010/30/EU on the indication by labelling and standard product information on the consumption of energy and other resources by energy-related products, as well as a set of implementing directives/delegated acts.

The ECS assists the Contracting Parties in developing and monitoring the NEEAPs required by Directive 2006/32/EC on energy end-use (Article 14), through the activities of the Energy Efficiency Coordination Group which meets approximately three times a year.

Most of the Contracting Parties submitted their first NEEAPs to the Secretariat during 2010. These first NEEAPs were intended to set energy savings targets and propose concrete measures and actions at the level of each Contracting Party that would contribute to meeting the targets. For the purpose of the first NEEAP, each Contracting Party was to set an overall national indicative savings target of 9% or higher, to be achieved and measured in 2018, and an intermediate national indicative savings target to be achieved in 2012. The ECS reviewed the first NEEAPs in 2011 and a further review is scheduled for June 2013, with the

16

submission of the second NEEAPs, which include a review of energy savings achieved.

In practice, there is considerable potential for energy savings in the Western Balkans as demonstrated by the World Bank12 in a report in 2010.

4.2. Role of governments

4.2.1. For energy efficiency

Meeting the commitments for energy efficiency requires a stronger role for national governments than before. Whereas in the past most of the financing was realised on a bilateral level between IFIs and the private sector (including involvement of local banks), more actions from states are now expected to (i) ensure the exemplary role of the public sector and (ii) to fill the gaps in private sector funding:

1. The new NEEAPs force the public sector to increase the number of actions it takes with respect to EE. Not only does the state and/or local authorities manage various energy-consuming assets (utility companies, office and cultural buildings, public transport, schools, hospitals, car fleet, public lighting, water supply, etc.), the European Commission (EC) furthermore expects the public sector to give an example to the private sector (this request was already included in the 2006 Energy Service Directive and strengthened in the new EE Directive 2012/27/EC). Selected requirements for the public sector are to implement new procurement guidelines, to renovate 3% of the public building stock per year and move to more innovative financial mechanisms like energy-performance contracts with third parties.13

2. The private sector could face serious market failures or obstacles that hinder a further expansion of energy-efficiency measures. Some examples are transaction costs, lack of incentives (e.g. an owner does not directly benefit from an investment while the tenant has no incentive to make a long-term investment in a rented flat) or an unwillingness to take a loan due to (macro-) economic uncertainties.

This has two crucial dimensions for the states:

• Adequate instruments need to be identified and implemented to meet each sector’s requirements;

• These measures need to be financed (this must be looked at from two sides: first from the viewpoint of the investor who is looking for financial or fiscal support, and second from the perspective of the state, which needs to allocate money for the measure from the state budget or other sources).

As discussed above, a significant number of mechanisms is available and, based on the experience reviewed in other countries, the range of measures available seems to be adequate. However, some of the instruments, even if they are generally suitable and effective, have a significant impact on the public budget and in the current challenging economic environment need to be carefully evaluated before decisions are made on their use. In theory, states could set up their own national programme of loans combined with grants

12 World Bank (2010)13 See EC (2006) and EC (2011)

Sector

Transport

Residential

Public

Service

Industrial

% Energy Savings Potential

10

10–35

35–40

0–30

5–25

Table 3 Energy efficiency potential by 2020 in the western Balkans

{ }[ ]


{ } [ ]

Meeting the commitments for energy efficiency requires a stronger role for national governments than before. Whereas in the past most of the financing was realised on a bilateral level between IFIs and the private sector (including involvement of local banks), more actions from states are now expected to ensure the exem-plary role of the public sector and to fill the gaps in private sector funding Meeting the commitments for

energy efficiency requires a stronger role for national governments than before. Whereas

in the past most of the financing was realised on a bilateral level between IFIs and the private sector (including involvement of local banks), more actions from states are now expected to ensure the exemplary role of the public sector and to fill the gaps in

private sector funding

17

14 See ERGEG (2010)

designed to meet the requirements of the individual sectors and parties, but this is difficult to undertake in a situation of low growth projections, high public debt levels and shrinking fiscal space. Spending the state’s money in areas where alternatives are possible (with or without minor government spending) needs to be avoided in order to free up money for sectors where such alternatives are unrealistic. In addition (and this is valid in general), the state should not spend money on investments that could be realised by private parties anyway (or where these parties have sufficient alternatives from IFIs or others) to avoid windfall profits in private companies at the cost of the public budget.

4.2.2. For reform of the energy sector in general

When discussing energy efficiency in the Western Balkans, the general framework of the energy sector in this region also needs to be considered.

Liberalisation of markets and market structure

Although oil markets are usually more liberalised, the creation of a regional electricity and gas market is some years behind the EU, due to the Energy Community Treaty’s later deadlines for opening the market. The level of progress varies between the different countries and hence the level of attractiveness for investors.

The markets are dominated by a few incumbent suppliers and generators, which are usually state-owned. In addition, not all companies have fully unbundled their network businesses from the retail and supply branch yet.

Nevertheless, according to the Energy Community Treaty, Directives 2003/54/EC and 2003/55/EC and Annex I in particular, all non-household customers shall be eligible as from 1 Jan 2008, and all customers as from 1 Jan 2015 to choose their supplier freely and without legal restrictions.

Infrastructure

The transmission and distribution infrastructure in the region is often outdated and needs significant investment. Gas markets especially are underdeveloped in most countries (except for Croatia and parts of Serbia). The power generation sector has a comparably high share of lignite plants with a low efficiency factor. There is a substantial demand for new investments to meet growing energy demand as well as to replace old and obsolete plants. The Energy Community’s latest Regional Energy Strategy adopted by ministers in October 2012 notes that a minimum investment of about €28.8 billion is needed for the Western Balkans plus Moldova over the period 2012 to 2020, although this is based on countries’ own estimates and has not been optimised for the region. The strategy does not provide details on the potential sources of finance of such investments. It is understood that the Energy Strategy Task Force is examining financing issues in 2013 including the development of criteria to determine the projects that are a priority for implementing the strategy.

Price regulation

Most electricity and gas end-user prices (especially for households) are regulated in the Western Balkans. This is of particular importance not only in relation to competition but also from an energy efficiency point of view. Regulated prices, i.e. prices set ex ante by a regulator or by a company and ex post approved by a public authority, hinder price competition and therefore are critical from an EU internal market perspective.14

{ }[ ]


{ } [ ]


Financing energy saving, for which funds are available, may in some cases be more feasible than financing new

capacity, for which funds have yet to be found

18

Due to social (households) and competitive (industry) aspects these prices in most cases do not cover the real costs of electricity generation or gas imports. This is of increasing concern, as it delays funding for investments in the sector.

From the energy efficiency perspective, regulated prices are of great harm as they do not signal the real costs of energy and lead to a suboptimal allocation of resources. Following the logic of the market mechanism, prices below their supply costs lead to a demand level that is too high or, in other words, there are no incentives for consumers to change their behaviour towards energy saving. From an economic perspective, this has at least three major problems:

• The prices are too low to cover the costs of the supply chain. In this way, somewhere in the system a loss occurs (or, if tariffs are set so that they recover the costs, the possibility of positive revenue has been lost, which is nearly the same from an opportunity cost view). Given that many companies in the region are state owned, the state (or in practice the taxpayer) ultimately has to cover these costs;

• Future investments in new capacity or even in maintenance, replacement and reliability are not covered, and therefore the economy is poorly served;

• For most energy products, even the market price does not reflect all costs. Costs in relation to the environment (external effects) are usually not covered. This is clearly a market failure and requires state action. In the case of low regulated prices the state not only fails to internalise external effects, but makes it even worse by giving incentives to increase energy demand (whereas its duty should be to reduce demand).

It is therefore counterproductive on the one hand to invest extensive financial resources to reduce demand while on the other hand the state’s pricing policy gives the opposite signal to the customers.

An increased price for energy could be interpreted as the best energy efficiency measure as it gives an immediate incentive for customers to change their behaviour. This is especially true for the big consumers and also, but to a lesser extent, for households. However, price rises can cause financial problems for low-income households and impact on the competitiveness of large-scale industry (similar issues arise with respect to energy-related tax reform discussed in section 5.2.1 below). Thus the state needs to consider additional distribution measures to deal with these issues, but they are separate issues from the need to introduce real market prices.

For energy-intensive industries, reduced tariffs and ex post payments are also suitable. However, the latter needs to be checked for compatibility with EU state aid guidelines.

The ECS was active on this issue during 2012 and, in July, a report proposing the phasing out of regulated prices was submitted for public consultation. Recommendations15 were subsequently prepared, and a timetable is being worked out for their implementation, before submission to the Ministerial Council for adoption. In the meantime, the Contracting Parties are invited to clearly define the notion of vulnerable customers by domestic legislation, as a precondition for more targeted ways to protect them than through undifferentiated price regulation. We may therefore anticipate some progress on energy price reform in the period of the Second NEEAP.

15 Recommendation of the Ministerial Council, Recommendation No 2012/1/MC-EnC of 18 October 2012, on reforms related to end-users electricity price regulation

{ }[ ]


{ } [ ]


An increased price for energy could be interpreted as the best energy efficiency

measure as it gives an immediate incentive for

customers to change their behaviour

19

16 Energy-UK (2013)17 This list is an illustrative guide and is to be used in conjunction with the definition – it is not possible to provide an exhaustive list of every condition that could indicate vulnerability, as all customers have their own needs. Suppliers may also work with charities and support agencies when they identify signs of vulnerability in a household. 18 Healy JD, (2004); Thomson and Snell 2013. 19 EBRD (2003) and Buzar (2007)20 UNDP (2004) 21 ECRB 2011

Fuel poverty and vulnerable customers

These terms are often used interchangeably, but are not the same; indeed they are often not even properly defined. Both need to be addressed when proposing energy price rises, whether through removing subsidies or adding taxes, but they need to be addressed in different ways. The presence of regulated prices in the Western Balkans means that protection of vulnerable customers is understood to mean a generalised subsidy through energy prices (or even special prices), rather than income support targeted to them directly through the social security system.

Fuel poverty concerns households who cannot afford to keep adequately warm at reasonable cost, usually set at 10% of their income spent on all energy related expenditure. It is therefore related to general poverty but also to the quality of housing and heating equipment. Measures addressing fuel poverty therefore can deal with other issues than just vulnerability to price rises, e.g. providing subsidised energy efficiency measures. Fuel poverty measures are generally financed through the social security system.

Vulnerable customers (i.e. individuals with a contract with an energy supplier) are identified in EU Electricity and Gas Directives which give energy regulators the duty to protect them. This relates mainly to protection from disconnection from networks, and not to economic benefits. However, their exact definition is left to individual countries. For example, the UK definition16 is:

A customer is vulnerable if for reasons of age, health, disability or severe financial insecurity, they are unable to safeguard their personal welfare or the personal welfare of other members of the household.

Suppliers in the UK are ultimately responsible for deciding whether a customer is vulnerable, but are expected to identify such potential customers first17. Suggested considerations are:

• A customer is caring for an elderly person in the household;

• A permanent member of the household is disabled or has a long - term medical condition (i.e. chronic illness) and is therefore unable to support themselves;

• An informed third party, such as a carer, social worker, health visitor or physician has indicated that a member of the household may be vulnerable;

• The age of any children living in the household;

• A customer dependent on medical equipment that is operated by electricity e.g. a stair lift, electric wheelchair, defibrillator or dialysis machine.

Surveys of fuel poverty have been carried out across the EU in 2004 and in 201318 and specific reports about the Western Balkans and about new Member States in Eastern Europe have been produced.19 The UNDP’s 2004 ‘Stuck in the Past’ report while specific to Serbia and Montenegro, remains applicable across the Western Balkans20.

In the Western Balkans, the idea of vulnerable customer is more related to economic benefits received through the energy sector. It is here that reform of regulated prices could cause more fuel poverty, if not compensated. Work by the ECRB21 in 2011 showed that an explicit definition of a “vulnerable customer” exists in 7 out of 11 analysed legislations; however, in 5 cases the definition is related to the energy sector as such (Bosnia and Herzegovina, Slovenia, Montenegro, Serbia and Kosovo). In the other cases, there is either a definition of a vulnerable customer in some other, non - energy related, legislative act (Social Welfare Act in Croatia) or there is no explicit definition of vulnerable customer at all. The criteria for achieving the status of a vulnerable customer differ among the investigated markets, but typically relate to the level of income or health problems or disability of a person or its family member.

In general, the term ‘vulnerable customer’ is not used, but economic and non-economic benefits are provided to these social groups through the energy sector. It is worth noting that very few Contracting Parties were able to present figures on the share of households qualifying for and/or receiving support.

20

This lack of information might either be due to the fact that financial support is not within the national regulators’ competence or that the figures simply do not exist (e.g. there is no institution following the practical implementation of support). It is therefore not clear what level of financial support through the social security system is really required for vulnerable customers, if regulated prices are removed.

For households, measures such as special tariffs for those households receiving social benefits, extra social security payments or additional measures for social housing programmes can be used to offset the impact of price increases. However, additional social security payments as compensation for higher tariffs are preferable as they keep the price signal function alive for the population. Introducing a somewhat lower tariff for those in receipt of social payments can undermine the price signals for these customers, but there might be a compromise as at least, for the majority of households, the price signals are still in place.22

4.3. General financing choices for governmentsThe selection of a financing mechanism by the government may be restricted by the macroeconomic framework in the relevant country. Given the low growth projections, the limited size of the state budget with respect to the tax base (due to the ongoing transition process and the economic crises),23 the financing of energy-efficiency measures needs to be carefully weighed against other policy choices.

4.3.1. Macro-economic environmentThe IFI Coordination Office regularly updates its “Food for Thought Paper” on the Macro-Economic Outlook for the Western Balkans.24 The charts and tables below set out the latest growth projections for the Western Balkans as of May 2013.

22 The distribution effects are different for the additional social security payments and the lower tariff solutions. In the first case, the burden is shared by all taxpayers whereas the tariff solution keeps it within the group of electricity or gas customers. As the first option distributes the costs on a broader base and there is a general logic that additional social security measures should preferably be implemented by taxes rather than prices, this is clearly preferred from an economic perspective.23 See WBIF (2012) for a discussion on the current outlook for the macroeconomic development. MWH (2011) describes institutional restrictions that could also seriously constrain some mechanisms. 24 IFI Co report Outlook for Macro-Economic Development in the Western Balkans and Implications for the WBIF downloadable from http://www.wbif.eu/Macro-economic+Issues

-2 -1 0 1 2 3 4 5

2012 2013 2014

AlbaniaBosnia and Herzegovina

Croatia Kosovo

FYR of Macedonia Montenegro

Serbia WB simple average

WB weighted average EU 27

EU 17 CEE

Figure 3 Projected growth rates for western Balkan countries, april 2013 projections

21

The countries of the Western Balkans are experiencing serious difficulties in financing investments due to sluggish growth of incomes, taxes and remittances. The global economic and financial crisis and particularly the problems in the euro zone have significantly reduced the fiscal space of governments in the region, public debt has attained critical levels for some countries, and access to bank lending and capital markets has become more difficult. The crisis has highlighted internal structural weaknesses and exposed a lack of progress in reforms that would release public resources for investments in growth-sustaining infrastructure. Weaknesses are identified in the political and regulatory environments. The climate for foreign and domestic investments needs significant improvement in the region. Moreover the constraints on private sector development restrain the dynamics of Western Balkan economies and undermine expectations of a quick recovery.

AlbaniaBosnia and Herzegovina

CroatiaKosovo

FYR of MacedoniaMontenegro

SerbiaWB simple average

WB weighted averageEU 27EU 17

CEE

0 20 40 60 80 100

2012 2013

Figure 4 Projected general government debt % gdP, april 2013 projections

Table 4 growth projections in the western Balkans

Albania

Bosnia and Herzegovina

Croatia

Kosovo

FYR of Macedonia

Montenegro

Serbia

WB simple average

WB weighted average (using 2012 population estimates for weights)

EU 27

EU 17

CEE

Real GDP Growth, % 2012

1.3

-0.7

-2.0

2.1

-0.3

0.0

-1.8

-0.2

-0.8

-0.2

-0.6

1.6

2013

1.8

0.5

-0.2

2.9

2.0

1.2

2.0

1.5

1.4

0.0

-0.3

2.2

2014

2.5

2.0

1.5

4.3

3.1

2.0

2.0

2.5

2.2

1.3

1.1

2.8

2012

0.5

0.0

-1.1

3.8

1.0

0.2

-0.5

0.6

0.1

-0.2

-0.4

2.0

2013

1.7

1.0

1.0

4.1

2.0

1.5

2.0

1.9

1.8

0.5

0.2

2.6

2014

2.5

2.5

1.5

3.2

3.5

2.0

2.5

2.5

2.4

1.5

1.2

3.2

2012

0.8

-0.7

-0.9

-1.7

-1.3

-0.2

-1.3

-0.8

-0.8

0.0

-0.2

-0.4

2013

0.1

-0.5

-1.2

-1.2

0.0

-0.3

0.0

-0.4

-0.4

-0.5

-0.5

-0.4

2014

0.0

-0.5

0.0

1.1

-0.4

0.0

-0.5

0.0

-0.2

-0.2

-0.1

-0.4

% point difference between projections in October 2012

and April 2013 October 2012 Projections

April 2013 Projections

22

Table 5 shows that fiscal space in the region is shrinking, with the 2013 projections for public debt now being 1.3 percentage points higher than the projections from the fall 2012. Public debt projections for 2013 have increased for all countries with the exception of Albania, Kosovo and Montenegro. The total public debt of the Western Balkan region is still relatively moderate at around 54% of GDP (weighted average). However, there are considerable variances among the countries. Albanian and Serbian public debt is now above 60% of GDP and Croatia and Montenegro now have debt levels around 54% of GDP while Kosovo is predicting a level of 17.4% for 2013.

In general, countries are aware of the fiscal space limitations and therefore investments in the different sectors of the economy including potential investments in EE must compete to get access to the limited space for borrowing.

4.3.2. Overall choices for finance

In principle, states have several options to finance state-run energy-efficiency mechanisms, which involve external borrowing, reallocation of the state budget, raising revenue through additional taxes, or reducing taxes to promote expenditure on EE priorities as follows:

1. States could take loans from IFIs or other external sources, which would increase the national debt, but are eminently suitable for EE since the loans can be mainly paid back using the savings in energy operating costs;

2. States could source EE investments from the existing budget and reduce spending for other policy areas, temporarily, while the savings accrue;

3. States could finance additional expenditures for EE with additional tax revenue which could come either from an increase of existing general taxes (income tax, VAT, etc.) or from a special tax in relation to energy efficiency (or other energy and environmental issues);

4. States could try to implement a cost allocation within the sector where the benefits occur (e.g. costs for measures in the household sector could be contributed to by all households independently of whether a specific household benefits or not) or directly to the beneficiary (e.g. a household that benefits from an investment has to pay (part of) the costs back); or

Table 5 general government public debt

Albania


Croatia25

Kosovo

FYR of Macedonia

Montenegro

Serbia

WB simple average

WB weighted average (using 2012 GDP for weights)

EU 27

EU 17

CEE

General Government Debt, % GDP 2012

60.6%

44.3%

56.3%

17.0%

33.3%

51.1%

63.7%

46.6%

53.8%

87.0%

92.9%

45.4%

2013

61.8%

42.1%

59.5%

17.4%

34.3%

52.9%

64.7%

47.5%

55.3%

89.0%

95.0%

45.6%

2012

63.8%

43.7%

54.3%

15.0%

30.9%

53.9%

63.1%

46.4%

52.9%

87.2%

93.6%

45.3%

2013

65.1%

41.3%

57.0%

17.9%

29.7%

53.6%

63.9%

46.9%

54.0%

88.7%

94.9%

45.0%

2012

-3.2%

0.6%

2.0%

2.0%

2.4%

-2.8%

0.6%

0.2%

0.9%

-0.2%

-0.7%

0.1%

2013

-3.3%

0.8%

2.5%

-0.5%

4.6%

-0.7%

0.8%

0.6%

1.3%

0.3%

0.1%

0.6%

% point difference between projections in October 2012

and April 2013 October 2012 Projections

April 2013 Projections

25 Excluding government guarantees amounting to 15.2% of GDP.

23

5. States could forgo some tax revenue by allowing capital investment incentives (tax rebates, VAT reductions) for households and companies making energy- efficiency investments (e.g. new cars, solar panels).

Mechanisms introduced under point 4 in the list above would have the advantage that, depending on the individual design of the measure, the state has no or only limited costs. Examples for such mechanisms are presented in section 6.3.

Of course, the decision for financing energy-efficiency measures needs to be coordinated between all the relevant ministries and cannot be an isolated measure. Given the macroeconomic situation in the Western Balkans, a further increase in public debt for energy efficiency needs to be weighed up carefully by the government.

4.4. Options for improving the delivery of funds for EE in the Western Balkans

According to the first NEEAPs, various EE measures are already launched, or at least planned, in the Western Balkan countries. As the first NEEAPs focused on the overall transposition of the three EU Directives on energy efficiency and the creation of primary legislation, institutions and capacity building, many measures are not yet fully implemented. In general conventional instruments (loans or grants, financed by IFIs or from the state budget) and, in some cases, energy-efficiency agencies and energy-efficiency funds have been adopted.

The second NEEAPs envisage improvements in the legal and financial framework to remove barriers to adopt a wider range of mechanisms. It should be remembered that finance will not flow through these new mechanisms immediately, and so their effectiveness cannot be assessed until after a suitable period to allow for legal and financial changes, publicity and implementation. It is important therefore to consider the suitability of a range of mechanisms and not to “place all one’s eggs in one basket”. Transaction costs should also be considered as schemes become more complex and include private sector administration and profit.

Recommendations for the future NEEAPs follow in the remaining sections.

24

25

5 modES oF FinanCing To gEnEraTE FundS For nEEaP imPlEmEnTaTion5.1. Financial mechanisms

5.1.1. Loan support from IFIs and donors

A range of loan financing is available to the Western Balkans, particularly from IFIs, both for the public sector and the private sector, which was fully reported26 in June 2011 with an updated summary report published in May 2013. Previously, some countries (e.g. Serbia, Montenegro27 and the Former Yugoslav Republic of Macedonia) have taken advantage of World Bank loans provided together with technical assistance, either by the World Bank itself or from multilateral or bilateral donors. In this way significant inroads have been made into improving the building stock of schools and hospitals thereby saving energy and operating expenses. These loans have been made to the government and backed by sovereign guarantees, with repayment guarantees from the budget rather than from the operating expenses of individual schools or hospitals.

26 Review of Financial Support Facilities Available for Energy Efficiency and Renewable Energy in the Western Balkans and Summary Report, both available from http://www.wbif.eu/Energy27 For details of the KfW financed programme in Montenegro see: http://www.energetska-efikasnost.me/ee.php?id=24&l=en












Financialmechanisms



Fiscalmechanisms

Deliverymechanisms



• Loan support from IFIs and donors • Internal “loans” or budget capture with multi-annual accounting• Energy service agreements• Energy price reforms

26

EBRD, EIB and KfW provide credit lines to local banks, intended for on-lending to SMEs and households. Other banks have been supported by guarantee funds (by USAID). Several of the loan funds are supported by grants from the European Commission.

Loan funds are also available for municipalities from IFIs such as KfW and EBRD. However, many municipalities face borrowing restrictions either in terms of fiscal space – in some cases, such as in Serbia, municipal borrowing is included in public debt figures – or legal capacity to borrow. This can severely restrict the ability to finance good energy-efficiency projects, such as street lighting, water supply and district heating, etc. Table 6 below gives an overview of the main EE and RE financing facilities available. Details of the various funds, including contact information, are available in the 2013 IFI CO report mentioned above.

5.1.2. Internal “loans” or budget capture with multi-annual accounting

In the past, public finance in the region operated on annual accounting principles, and it was impossible for ministries or municipalities to make investments in one year, where the investment would be repaid in later years. However, as multi-annual accounting (or medium term expenditure planning) is being implemented by the various Ministries of Finance, line ministries and municipalities may be able to implement some projects with short payback periods (within the timeframe of the multi-annual accounting). This “internal borrowing” or “budget capture” may provide some finance without the need to take loans, and without any interest payments. Technical assistance could help identify suitable short payback projects. A good example of

{ } [ ]


{ }[ ]


Examples of industrial and commercial energy

efficiency projects can be found under “case studies” on www.ebrdseff.org

Table 6 overview of the main EE and rE financing facilities in the western Balkans (2013)

Regional Total

Regional Loan Funds (with TA and grants)

Regional TA Programmes and Funds

Country Loan Funds (with TA and grants) Total

Croatia

Montenegro

Serbia

Country Mixed/EE Loan Total


Montenegro

Serbia

Country TA Funds Total

Montenegro

Kosovo

Country Grant Funds Total

FYRo Macedonia

Serbia

Country Guarantee Funds Total


FYRo Macedonia

TOTAL:

No.

15

12

3

5

1

1

3

6

2

1

3

2

1

1

4

3

1

2

1

1

34

EUR mil.

1075,35

1062,95

12,40

66,66

*

7,71

56,35

348,00

60,00

50,00

238,00

3,00

1,50

1,50

16,53

16,33

0,20

30,00

15,00

15,00

1539,54

% of total

69,85%

69,04%

0,81%

4,33%

*

0,50%

3,66%

22,60%

3,90%

3,25%

15,46%

0,19%

0,10%

0,10%

1,07%

1,06%

0,01%

1,95%

0,97%

0,97%

100,00%

27

this is street lighting, where changing to the latest low-energy equipment may have a 1–2 year payback period, easily achieved in the usual 3-year multi-annual accounting period. Where projects are suitably sized, a rolling programme of replacements could be managed without additional finance, except in the first year of the programme.

5.1.3. Energy service agreements

The aim of these agreements is to solve the problem that some facilities supported by the state budget are not legally independent, and so cannot borrow, but need investment. The World Bank has developed this type of agreement using its R2E2 Fund in Armenia28 which functions like a “super ESCO” (energy services company - see 6.2). In Armenia, schools are allowed to sign contracts in a commercial way, despite not being deemed as legally independent to borrow. The circulation of finance through the client, utility, ESCO contractor and the Fund is shown in Figure 5 below. The Fund and public entity (school, hospital, municipality) agree on a baseline cost for energy consumption and a target is set for its reduction. The client makes energy payments in line with the baseline figure (adjusted for changes in tariffs, comfort levels, weather) for 10 years. The Fund pays the energy bills (via an Escrow29 account) and retains the rest as repayment on its investment. The payback period for the investment in this case is considered to be 10 years. The Fund contracts the ESCO to carry out the investment installation and also its operation and maintenance. In this way, there is no loan, (and hence no interest payment) simply a long-term contract between the school and the Fund for payments for utilities. Since both parties are public entities, the Fund can end the contract once it has recovered its investment and fee, i.e. the contract can have a flexible duration.

This possibility has also been proposed for FYR Macedonia, but for municipalities to take an interest-free loan from the national EE fund, supported by payments from the municipalities’ independent (non-Ministry of Finance) income (e.g. revenue from municipal services, local taxes, rent from public land/assets, property sales, etc). In this case a slightly different circulation of funds is needed. The Ministry of Finance does not consider these “internal loans” as debt, but as long-term payment contracts.

Both these concepts are at early stages and are evolving but merit further consideration.

28 http://documents.worldbank.org/curated/en/2012/03/15931877/armenia-energy-efficiency-project29 The Escrow account identifies money paid by the client, with the purpose of paying utility bills first, to ensure that the bills are always paid. Any surplus (as energy bills are reduced by the investment) can be transferred to the fund.

{ }[ ]


{ } [ ]

Meeting the commitments for energy efficiency requires a stronger role for national governments than before. Whereas in the past most of the financing was realised on a bilateral level between IFIs and the private sector (including involvement of local banks), more actions from states are now expected to ensure the exem-plary role of the public sector and to fill the gaps in private sector funding Multi-annual accounting

allows the implementation of projects with short payback periods, such as street lighting, where changing to the

latest low-energy equipment may have a 1–2 year payback period, easily

achieved in the usual 3-year multi-annual accounting period

Payment for recovery of investment costs and service fee

Energy service agreement

Baseline utility payments

Utilitybills

R2E2Fund

PublicFacilities

EscrowAccount Utility

ESCOs

Installation of energy-saving measures

Flow of fundsGoods/services

Contract for design and goods and works;

payment partially based on performance

Figure 5 Energy service agreements

Source: world Bank (2012)

28

5.1.4. Energy price reforms

This has been fully covered under section 4.2.2. The price rises themselves provide a greater incentive to adopt energy-efficiency measures and the extra revenue can be used to provide extra funding for measures to be financed directly by the government, or to finance the legal obligation schemes discussed later.

5.2. Fiscal mechanisms

5.2.1. Energy taxes

Background

Energy-related tax reform is a useful way to promote energy efficiency. While most countries already have taxes on fuel consumption, their level varies and in most cases this is the only energy-related tax in the overall taxation system, and is related to excise duties. Historically, additional fuel taxes are not justified by energy-related arguments, such as efficiency measures or external effects, but with, for example, the need for states to finance roadways.

In addition, as the EC has noted, taxes on individual fuels are not correlated with their CO2 emissions, often creating perverse incentives. The European Commission on 13 April 2011 presented its proposal to overhaul the outdated rules on the taxation of energy products in the European Union. The new rules aim to restructure the way energy products are taxed to remove current imbalances and take into account both their CO2 emissions and energy content. Existing energy taxes would be split into two components that, taken together, would determine the overall rate at which a product is taxed. The Commission wants to promote energy efficiency and consumption of more environmentally friendly products and to avoid distortions of competition in the Single Market30.

From the energy-efficiency perspective and with respect to the Western Balkans’ budgetary situation, the taxation of energy has numerous advantages:

• The price increase caused by the tax sets an immediate incentive to save energy. This effect is typically lower for households as: energy costs only make a small part of the total expenses; most customers are not aware of energy prices at all; and finally, as energy prices are regulated, they are still low, even with a tax increase. The effect is, on the other hand, very high for large industrial consumers where energy costs are one of the main cost drivers of their operational expenses;

• The tax revenues can help finance other energy-efficiency measures. Part of the revenue could flow into an energy-efficiency fund, with another part allocated to measures for the protection of vulnerable customers;

• Compared to other tax increases, energy taxes are the economically correct instrument to implement energy efficiency. Increasing general taxes (income tax, VAT) can also increase states’ revenues but have no steering effect towards energy saving;












Financialmechanisms



Fiscalmechanisms

Deliverymechanisms


• Public ESCOsInstitutions• Carbon, energy or environmental taxes


30 http://ec.europa.eu/taxation_customs/taxation/excise_duties/energy_products/legislation/index_en.htm

{ }[ ]


{ } [ ]


Revenues from taxation measures can be

integrated into the general budget or transferred

to a special energy and environmental fund

29

• A tax increase justified by environmental impact and energy-efficiency potential may be more politically acceptable than an increase of general VAT or income tax;

• To be most effective, these measures need to be flanked by a reform of the regulated downstream pricing system (Section 5.1.4).

Taxation of energy has two particular downsides that should be considered.

1. Low-income households in particular suffer from additional taxation of electricity and heating fuel, which means such taxes usually have a regressive effect.31 This has at least two dimensions: energy costs cover a significant share of their budget which puts a relatively higher burden on these households compared to normal households where energy costs of the same amount play a minor role. In addition, low-income households are usually not able to react to these price signals as their budget is too small for most efficiency investments. Given this, additional measures might be appropriate. These could include special tariffs for households getting social benefits, extra social security payments or additional measures for social housing programmes (e.g. a state budget-financed upgrade of social housing or obligations on energy suppliers to undertake these investments).

2. Certain industries might be placed at a disadvantage compared to competitors in other countries. This is particularly relevant for those in an energy-intensive industry, where energy prices are an important cost factor, which will suffer even under a small tax increase. Possible solutions here include a grace period to give the companies the opportunity to invest in efficiency measures, a cap on total energy tax payments or a reduced tax rate. To keep the intended steering effect of energy taxation in place, the tax reduction could be granted only to companies that commit to certain efficiency measures.

Nevertheless, several options exist to tax energy in the following areas:

• In general, taxation of households, but combined with social transfers to households with low income level, or a wider group of vulnerable customers (or lower tariffs for this group of households);

• Taxation of small business and industry not facing international competition;

• Taxation of electricity production from oil products (especially “dirty” products like heavy fuel oil, or bunker fuel), coal or nuclear energy;

• A gas tax (but not all Western Balkan countries are connected to the international gas system yet);32 or

• (Additional) taxation of the transport sector (e.g. by an increase of motor fuel taxes, motor vehicle tax or a special charge in relation to CO2 emissions of the car or the type of fuel with respect to the technology used).

Instead of single measures, a package of measures could increase the positive effects of energy taxation. The idea of a so-called “ecological tax reform” (experiences from Germany are given in the next section) could create additional energy efficiency effects as well as other benefits for the society (such as reduced unemployment or redistribution to low income households).

An ecological or energy tax reform could contain, among others, the following elements:

• Increase in motor fuel taxation (e.g. in relation to energy content or CO2 emissions);

• Taxation of heating energy sources (e.g. fuel oil, gasoil, gas);

• Introduction of an electricity tax (as, traditionally, taxation focuses on oil and gas);

• Taxes at the wholesale level (e.g. coal, nuclear fuel elements, fuel oil);

• Reform of motor vehicle tax (from the traditional taxation by cylinder capacity towards energy efficiency or CO2 relation);

• CO2 tax (for sectors not covered by the ETS);

• Reduction of commuter tax relief; and

31 Regressive effect means that those on lower incomes in particular suffer most from a certain measure. As low-income households spend most of their income on basic goods like food, rent and energy, they are relatively more impacted by an energy (also VAT) increase than the higher incomes, which pay a much smaller part of their income for such goods. Also, those on higher incomes are better placed to deal with energy tax increases. 32 In a system of gas imports based on oil-indexation (which is still standard in those Western Balkan countries that use natural gas), such a tax would be passed to the export company as, due to the logic of netback pricing, such a tax would lower the cross-fuel competitiveness of gas which needs to be reflected in the import price and the margin sharing. See IEA (1998) or Austvik (2003). always paid. Any surplus (as energy bills are reduced by the investment) can be transferred to the fund.

30

• Introducing energy-efficiency elements in real estate taxes; combined with reduction of income tax (especially for low-income households or households which realised energy efficiency investments);

• Reduction of contribution to social security system; or

• Social transfers to households which suffer most from additional energy taxation.

Selected experiences

Energy taxation is very common in the EU and has been increasing in recent years. However, there are significant differences in the level and the subjects of taxation.33

Some, mainly smaller, countries have introduced only one or two additional taxation elements, whereas others have undertaken an extensive tax reform with several elements. Malta, for example, has introduced an additional duty on motor fuel (3.5 ct/l for super, 2 ct/l for diesel), revenues from which are used to finance energy-efficiency measures. Estonia introduced new taxes on gas and electricity in 2008. In 2011 those taxes were raised significantly (+134% for gas and +40% for electricity). Together with a comparable tax increase for existing motor fuel taxation (+40% between 2008 and 2011), the absolute energy taxation level is now significantly above the minimum requirements in the EU. The revenues are transferred to the general budget.

More fundamental reforms have been carried out in Sweden and Germany. In Sweden all grant-based measures have been replaced by a tax-based incentive regime. Existing taxes have been increased and a new CO2 tax introduced. The Swedish government actively promotes the role of high prices as an incentive for changing the behaviour of consumers. Energy-intensive industry was exempted from most of the taxation but this exemption will be abolished in 2015. In addition, tax incentives are granted for some energy-efficiency measures. This relates mainly to specific sources of heat generation (e.g. biofuels) and to low-emission cars that can be exempted from the (carbon-related) vehicle tax for five years.34

The German “ecological tax reform”, which started in 2000, was a bundle of measures including:

• An increase in existing motor fuel and gas taxes (e.g. Super up to 66 ct/l);

• Introduction of a new electricity tax (2 ct/kWh for households, industry has several exemptions and pays significantly lower tax rates);

• Reduction and abolition of tax reductions and subsidies in respect to energy consumption (e.g. reduction of commuter tax relief).

The revenue from the energy tax reform is used to reduce the social contribution of employers and employees in order to (1) reduce unemployment by lowering labour costs and (2) to increase acceptance of the new tax. A law on the phase-out of nuclear energy35 and the introduction of a renewable energy support scheme accompanied the tax reform. In addition, also the income tax law was renewed with significant lower marginal tax rates (up to 7 percentage points). The support scheme is financed by a surcharge on the electricity price (approx. 3.6 ct/kWh in 2012) and, in this way, should also have a steering effect for consumers. In the meantime, energy taxation is the third-largest tax source in the German budget (after income tax and VAT). As energy-intensive industry was granted significant exemptions from the energy tax, households and SMEs shoulder most of the burden. In order to promote efficiency measures in industry, the possibility of only granting exemptions when certain efficiency standards are met or efficiency investments are made, is now under discussion.

5.2.2. Tax reductions as investment incentives

The introduction of energy taxation (see section 5.2.1) sets an immediate incentive for energy savings in order to reduce the energy tax payments. Alternatives (or additions to energy taxes) are tax reliefs from the main taxes, namely income tax and VAT. However, in addition to specific issues arising from these

33 Finnish Energy Industries (2010) provides a good overview over tax levels in Europe, Japan and the US. See Frontier Economics (2011) and Frontier Economics/EWI (2010) for international comparison studies with a detailed analysis of energy price components. IEA (2012) provides extensive background and statistics on energy taxation.34 Further reductions are in place but in relation to income taxation. They will be discussed in section 5.2.2.35 The nuclear phase-out was moderated by the new elected government in 2010. In turn, operators of nuclear plants have to pay a tax on nuclear fuels, which revenue contributes to an energy and environmental fund. However, the phase-out was forced again after the Fukushima nuclear disaster in 2011. As a consequence, the operators abandoned payments to the fund.

31

fiscal measures, another general aspect needs to be considered: whereas the introduction of an energy tax increases state revenues and sets incentives, income tax and VAT reductions also set incentives but decrease state revenues. Revenue neutral incentives (e.g. in France) rely on imposing some taxes on less-efficient equipment in order to create some budgetary space to provide incentives for the more efficient models.

Income tax deductions are easy and quick to implement, which is an advantage compared to energy tax reforms, the introduction of which usually needs some time to prepare. States can define certain measures (e.g. investment in solar panels, where justified as energy savings) that are tax deductible and this list can be adapted annually to react flexibly to market developments.

However, some distribution effects need to be taken into account.36 Income taxes are often designed with progressive tariffs, which means the marginal tax rate increases with income. In this way, households with higher income not only pay absolutely more taxes but also a relatively higher proportion of their income. In turn, tax reliefs or deductions favour households with higher incomes as their benefit is higher than for those on low incomes. If a household pays only low or no income tax, tax relief measures can have no impact on them. Nevertheless, income tax reductions can be a pragmatic first step for households or housing associations. This measure is already implemented in several EU member states with different specifications (e.g. in Sweden 50% of the costs of a measure can be recovered from income tax).37

VAT reductions are also a pragmatic solution. Certain efficiency measures and technologies can be defined to fall under a reduced VAT rate. A system of reduced VAT rate (mainly for food or other basic goods) is implemented already in all EU MS and most countries in the Western Balkans (see Table 7) so in principle, efficiency measures could be included without much administrative effort.

Whereas (progressive) income taxes are in principle the general distribution policy tool, VAT schemes usually have so-called regressive effects. Households with lower incomes have no possibilities to save or invest as all of their income is spent on consumption (mainly basic goods and rent). Given the high consumption rate, those low-income households suffer more from a VAT increase. In turn, while a VAT deduction for energy efficiency investment favours low incomes, it is doubtful if those households would invest anyway (due to lack of funds).

With respect to company taxation, increased capital allowances for efficiency measures or technologies are also easy to implement and are very common in a number of EU MS. Accelerated depreciation allowances are another way to promote investment by allowing purchasers to write-off the cost of depreciation of qualifying equipment more rapidly than standard equipment, thus effectively reducing the after tax total cost of the equipment.

{ }[ ]


{ } [ ]


Income tax reductions can be a pragmatic first step for households or

housing associations

36 A more formal aspect is that income taxation should usually follow the income flow principle, which means the level of taxation should be defined by the amount of income and not by what the income is used for.37 A survey of all 2nd NEEAAP shows that 11 member states have tax reductions in place, of which only two are new member states. Usually costs for efficiency investments by companies or households are subject of the reduction, in some cases also certain behaviours (like biking to work). Most reductions are in relation to income or corporation tax (BE, DE, EL, FR, IE, IT, NL, SE, UK), but some countries have also implemented tax reduction schemes for other taxes in place or announced. Some examples: VAT (FR, LT), energy/environmental taxes (DE, LT), rental property tax (FR) or car registration tax (MT).

Albania


Croatia

Kosovo

FYR Macedonia

Montenegro

Serbia

Main VAT Rate

20%

17%

25%

16%

18%

17%

20%

Reduced Rate

10%

-

10%, 0%

-

5%

7%

8%

Table 7 vaT rates in the western Balkans

32

33

6 dElivEry mEChaniSmS To imProvE ThE uTiliSaTion oF FundS For EE

6.1. Technical assistance for project identification and preparation for loans

Project identification and preparation for loans is usually the most common use of technical assistance support that can accompany loans at national level. In addition to supporting one-off individual projects in the private sector or households, TA can also be used in the public sector to develop and implement municipal energy plans and to bundle smaller municipal projects together to better manage public procurement or lack of technical expertise. Technical assistance is available from the EC and a number of IFIs and bilateral donors.

For example the World Bank is now (i) preparing one additional financing project for EE in public buildings in Montenegro, (ii) preparing two new investment projects for public building EE (Kosovo, Bosnia and Herzegovina), and (iii) planning to initiate two follow-on investment programmes for building EE (Serbia and FYR Macedonia).












Financialmechanisms



Fiscalmechanisms

Deliverymechanisms



• TA for project identification and preparation for loans or public procurement• ESCO market, with performance contracting and third-party financing• Legal obligations for utilities (with trading certificates)• Energy-efficiency funds (including revolving funds)• Voluntary agreements/non-financial incentives

34

In addition, both the World Bank and EBRD are providing more general TA facility covering all the Western Balkans. The World Bank project is to scale-up energy-efficiency improvements in buildings in the selected countries by developing a roadmap for implementation and sharing of best practices, policy and implementation options, case studies and plans across the target countries. Through its Regional Energy Efficiency Programme, EBRD will look at enabling the development of ESCO projects (see below).

6.2. Creating a market for energy services

Establishing a market for energy services can allow third parties from the private sector to take over the borrowing needs of public sector organisations, especially municipalities, removing these liabilities from the public sector balance sheet38. However, this mechanism requires the presence of private sector companies - so called Energy Service Companies, ESCOS - with the necessary skills and experience to understand the energy-efficiency technologies required, and the capacity to install and operate them. They must also be willing to take the risk of borrowing for the investment and guaranteeing the energy savings that will pay back the loans. Figure 6 shows one form of the relationships, but the ESCO may also simply provide services and existing relationships would not change.

Although many firms are capable of supplying and installing EE technologies, not all are willing to take on the operation of the energy systems in a school or hospital for a municipal client on the basis of a loan paid back over several years. Special requirements for procurement and contracting between the municipality, the installer and the banks are needed. The special arrangements should include a guaranteed performance for the amount of energy saved, and can include sharing the savings between the client and the contractor, once the loan has been repaid.

{ } [ ]


{ }[ ]


TA can be used to develop and implement municipal energy plans and to bundle smaller municipal projects together to better manage

public procurement

Service Agreement

Finance

SupplyAgreement

EnergyServices

ESCO

Housing Association/ Developer

Bank/ENER-G

Landlords/Residents/Non-Residents

SubcontractedServicesUtilities Services

Figure 6 ESCo relationships (in private sector but also works for public sector)

38 Off-public balance sheet financing through private sector depends to a large extent on the public accounting rules. Currently in some EU countries such ESCO contracts are considered as being on the balance sheet of the local authority to which the building/equipment belongs, because the invested assets are so closely linked and will be owned in the end by the local authority.

35

Advantages of ESCO energy-efficiency projects can include:

• Private sector expertise to design and implement EE investments, and optimised operation;

• Procurement based on efficient performance (outcome, not output) and selecting the most economical technical solution criteria, i.e. based on lifecycle costs, not just the smallest investment project cost;

• Private sector financing with no public debt (off-public balance sheet).

Most Western Balkan countries are aware of the potential this measure has but, further government-driven initiatives are needed to create a market for energy services that can increase loan finance available to both the public and the private sectors. The newly established Regional Energy Efficiency Programme, financed under the Western Balkan Investment Framework (WBIF) and led by EBRD (see box below), focuses on improving the legal framework for ESCO projects in the public sector. This programme assists interested Western Balkan countries to create the legislation that enables ESCO projects, and provides ESCO model contracts and information for all stakeholders in order to facilitate certainty for ESCO market development. Its regulatory support will include drafting secondary legislation that is needed for the actual implementation of ESCO projects. Furthermore, it will include practical ESCO project preparation by supporting public building owners.

EBRD has already identified the following gaps that it proposes to address over the next couple of years:

Financing gaps:

• Internal funding by public organisations: lack funding or debt ceilings reached;

• External funding: ESCOs do not finance long term on balance sheet;

• Banks lack experience in ESCO projects and don’t offer forfeiting (buying accounts receivables);

• Banks require high level of collateral for loans.

Regulatory gaps:

• Lack of clarity of legal procedures regarding ESCO projects: procurement and budgetary treatment;

• Lack of administrative instructions/guidance;

• Lack of contract and tender templates;

• Lack of monitoring and verification protocols.

Technical gaps:

• Lack of awareness and information;

• Clients’ lack of expertise and resources for preparing ESCO projects/tenders.

Regional Energy Efficiency Programme (REEP)This WBIF financed programme is a continuation of the EBRD’s WeBSEDDFF and WeBSEFF with three windows and a particular focus on energy efficiency in the public sector:

1. Window 1 (6M€): Regulatory and technical support for ESCO projects and to improve the legal framework for enabling energy efficiency investments

2. Window 2: Credit lines for financing small-scale projects in public and private sector through local participating banks (WeBSEFF)

3. Window 3: Direct financing for medium-sized renewable energy and energy efficiency measures (WeBSEDFF)

36

6.3. Legal obligations for energy suppliers

6.3.1. Background

According to Directive 2006/32/EC certain obligations can be placed on energy companies to secure energy efficiencies. However, states had a wide range of options on how to impose these obligations. In most countries they focused on requesting suppliers to inform customers about their energy consumption (see box below) and provided information on energy-saving options. Some other member states expanded this tool and placed individual saving targets (legally enforceable obligations) on individual companies. This is also a development from the previous voluntary demand side management measures, where electricity companies reduced their own costs for reactive power by encouraging consumers to reduce reactive power at the consumers’ installation (or by sharing costs with them). Here the scope has widened to gas and heating utilities and is focused on general energy-efficiency measures at the consumers’ premises, rather than just reactive power. This savings obligation has now been made a requirement in the newly approved Energy Efficiency Directive 2012/27/EU. In due course, therefore, it will become a commitment in the Energy Community.

Some voluntary schemes have also been known as utility financing schemes. However, this generally requires regulatory approval for tariff increases, and there are costs associated with modifying billing systems. So legal obligations (for which regulatory approval has already been provided) are probably a better way to proceed. In the Western Balkans utilities are already beginning to implement smart metering systems, which also require billing system modifications, but also provide more consumer data that facilitate the design and monitoring of EE measures.

Energy efficiency or savings obligations have already been in place for several years in five (old) EU MS (UK, France, Italy, Belgium/Flanders, Denmark) and introduced recently in two member states (2011: Bulgaria and Ireland).39 Poland has decided to implement an obligation scheme in 2013 and other countries are currently evaluating the option with feasibility studies (Germany, Czech Republic). Even if there is a huge variety in implementation design40, some key characteristics of such schemes can be highlighted:

• States put a savings target on individual energy companies (retailers or network operators) from the electricity, gas or district heating sectors, which is defined in relation to the number of customers or the amount of energy delivered (a saving of 1.5% in energy sold is stated in the EE Directive 2012/27/EU);

• Energy companies are responsible for achieving their targets and have to pay a fine if the target is not met;

• Public authorities (e.g. energy agency, energy ministry or regulator) monitor the process and, to control it, can ring-fence the measures that are creditable for the target (e.g. by not accepting unfavourable measures for the target or having a bonus/malus system for individual measures, or simply cherry-picking); and

• In most countries some kind of trading or bilateral transfer scheme is implemented (“White Certificates Trading”) to increase the efficiency of the system (and give incentives to companies to exceed the target).

Energy companies are by nature more familiar with the topic of energy efficiency than most local banks. Without the savings obligations, their usual financial incentives perversely encourage them to supply more

39 The schemes in Bulgaria in particular and, to some extent, in Ireland are of special interest as examples for the Western Balkans, given the countries’ size and austerity. Unfortunately, the schemes are in a start-up phase and no experiences can be reported yet. However, the general design of schemes in the UK and other countries, which are discussed later, seems to be comparable. Some indicative points are included in the NEEAPs of Bulgaria and Ireland. 40 Good cross-country comparisons could be found, e.g. in ECEEE (2012), Fraunhofer/Ecofys/Öko-Institut (2012), CIRED (2011) and EC/IE (2009).

Maximum Allowed Revenues in Kosovo The Energy Regulatory Office of Kosovo undertakes annual reviews of energy prices which serve as a basis for the definition of Maximum Allowed Revenues (MAR) for each of the regulated companies in electricity generation and transmission (KEK and KOSTT). The calculations also include efficiency factors to incentivise efficient operation and provide enhanced value for customers. The proposed efficiency factors for mining, generation and transmission of electricity for the period 2013-2016 is 4% per year. It is left to the companies themselves to decide where savings may be made and should they achieve efficiency gains beyond the levels suggested, their MAR will be increased.

37

energy. With the obligations, they are highly incentivised to promote efficiency (as otherwise penalties have to be paid) and develop good knowledge about energy consumption and the efficiency potential of their customers. Experience to date with obligations has been usually very good as they have a good target hit rate and are in most cases very cost efficient, meaning CO2 or kWh abatement costs are often below other measures.41

On the refinancing side, obligation schemes can be designed with different financing mechanisms, including external financing from IFIs. If the obligation is placed on energy suppliers, the cost recovery can be done by an increase in energy prices. If the obligation is placed on network operators or fully integrated energy companies, costs can be allocated to the regulated tariffs. In both cases, all customers of an energy company have to bear a part of the costs, regardless of whether they benefit from efficiency measures or not.

However, in practice some modifications exist. In most schemes the beneficiary of a measure has to pay a certain amount of contribution (which is usually below the full costs). An alternative to an upfront investment contribution is a PAYS (pay-as-you-save) scheme. In this case the energy company or an energy service company takes over the upfront payment and the payback is financed from the monthly savings. In certain cases, the state budget can provide grants for some investments (e.g. for social housing or vulnerable customers in a housing block). Another option for governments to reduce the price increase is to limit the cost volume a company can allocate to the regulated tariff or introduce obligations for special tariffs below market prices for some customer groups. But in this case, government has to subsidise this part of the cost from the general budget or a special fund (or accept to bear the operating losses of the company if the company is publicly owned).

Trading white certificates is a method of incentivising companies to obtain savings over and above their targets. Since some of the smaller countries of the Western Balkans do not have sufficient market actors, certificates would need to be organised on the basis of a common regional market for trading.

The financial aspect as well as most other design parameters vary across the country-specific obligation schemes. The table below provides an overview of those schemes that have been operating for several years in the UK, France, Italy and Denmark. Some more details are given in Annex A.

41 Availability of comparable data is an issue here. Not many programmes have transparent and/or comparable evaluation results which allow for the calculation of abatement costs expressed in €/t CO2 or €/MWh. Some estimation will be presented in Annex A.

Figure 7 relationships with legal obligation

Supplier allocatesremaining costs toall customers byhigher prices

Possible: pay-back withenergy bill

Possible:Own contribution

Possible: State or fundcontribute to costs

Energysupplier

5

Supplierpre-finances

measure

1

2

3

Possible:IFI support

4

HouseholdZ

HouseholdA

Government

IFIs

National Energy Fund

38

The UK experience

The UK schemes only concerns households, and especially targeted at vulnerable customers. They have been operating in some form or other since 1994. An evaluation has taken place, from which it is possible to extract the following key success factors for CERT (2005-8) in targeting the right customers.

• Partnership and cross-referrals by agencies enabled more effective targeting;

• Additional funding from municipalities and health scheme;

• Early eligibility check;

• Clearly branded scheme;

• Close involvement with municipality provided reassurance that offers were genuine;

• Intensive area-based activity and broad eligibility criteria helped take-up of free measures.

Delivery of the scheme involved a number of partners who can be seen in Figure 8.

Obliged party

Fuel

Sectors covered

Target

Target specifications

Programme efficiency

Trading

Cost recovery

Energy supplier

Electricity, gas

Households

293 M t CO2 “lifetime” (=cumulated)

40% of measures in low-income households, 68% in insulation

Targetover-fulfilled;total costs: 586 M. Euro (= 0,91 ct/kWh “cumac”)

Bilateral trading, no certificates,nearlyunused in practice

Own contributions ofbeneficiary,allhouseholds by higher energy prices, state budget by subsidies for lower incomes

Network operator

Electricity, gas

All (incl. transport)

6 M toe primary energy per year

None

Target reached in mostyears;nocostinformation available

Bilateral and exchange (spot) trading with “whitecertificates”,79% of all measures

Own contributions, all net users by higher tariffs, network operator (cap for cost increase)

Energy supplier

Electricity, gas, heating oil, motor fuel

All (incl. transport)

345 TWh “cumac” (=cumulated) end energy use

90 TWh “cumac” intransportsector;payment of 2 ct/kWh releases from target (buy-out price)

Target reached, but double counting of measures;totalcosts:673 M Euro (= 3,74 kWh “cumac”)

Bilateral trading with “whitecertificates”,4% of all measures

Own contributions of beneficiary,allenergyusers by higher prices (but regulated), state budget by tax releases

Network operator

Electricity, gas, district heating, heating oil

All (excl. transport)

1,5 TWh end energy use per year

None

Targetover-fullfilled;total costs: 95 M. Euro (= 0,56 ct/kWh “cumac”)

Bilateral trading, no certificates,nearlyunused in practice

Own contributions, all net users by higher tariffs

Table 8 Comparison of legal obligation schemes in four countries

39

6.4. Energy-efficiency funds

Another powerful tool to bundle fragmented financial mechanisms is the implementation of a national energy-efficiency fund. The fund can act as an aggregator or intermediary for IFIs and other external sources of finance and distribute large credit lines, incentive payments or contributions to various measures to many smaller borrowers (via energy agencies or banks).

The idea of a national fund seems to be quite a popular concept in the Western Balkans, as these funds are referenced in nearly all NEEAPs as a source for numerous measures. However, with the exception of Croatia, most Contracting Parties do not provide sufficient information on the financial sources, amounts and the exact legal status of such funds. In addition, the Serbian fund was abolished, following a change of government.

Most EU MS (19) have implemented one or more EE related funds. The individual design varies by several parameters of which the most important are the target or aim of the fund and the financial sources creating it.

With respect to the aim of the fund, several characteristics can be seen in the EU:

• Funds which focus solely or mainly on energy efficiency, e.g. Denmark, Ireland, Malta, Slovakia, UK;

• Funds with a broader focus, including renewables, environmental or climate change, as well as energy efficiency: e.g. Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, France, Germany, Greece, Italy, Latvia, Lithuania, Poland, Slovenia, UK;

• Energy efficiency as part of a general or specialised fund: e.g. Czech Republic (State Housing Development Fund), Finland (Innovation Fund), Lithuania (Privatisation Fund and Ignalina Nuclear Power Plant Decommissioning Fund), Slovakia (State Housing Development Fund).

Installers

Households

Localauthoritiesand RSLs,

partnerships

Managingagents, energy

advicecentres

Supermarketsand otherretailers

DIYretailers

Mon

itori

ngag

ents

Energy suppliers

Figure 8 Partnership arrangements for CErT

Source: ipsos mori, Cag and BrE 2011: Evaluation of the delivery and uptake of CErTSource: dECC 2011

Croatian Energy Efficiency FundThe Croatian Energy Efficiency Fund was established in 2003 with the primary aim of financing projects and programs for environmental protection and energy efficiency/renewable energy. Upon accession to the EU, the Fund will oversee activities in this field to be financed from structural and cohesion funds. The Fund currently draws its revenues from a variety of sources including polluters’ charges and special waste treatment charges, as well as local and regional government and international donors/IFIs. It supports projects through grants, preferential loans and a guarantee fund. At the end of 2010, the fund had financed 811 EE projects leading to savings of approximately 363 mil. kWh/year and 250 mil. HRK/year thus actively contributing to achieving the national 20-20-20 objectives.

More information: www.fzoeu.hr

40

Sources of financing for the funds are:• Contributions from the general budget;• Grants and loans from IFIs and local banks;• EU structural and social funds;• Bilateral donors from other states;• Energy taxes;• Energy-saving charges;• Payments from nuclear plant operators;• Sales and auctioning of carbon emission allowance;• CO2 or other environmental taxes;• Fees and fines for environment pollution;• Connection fees from electricity and gas networks;• Privatisation revenues;• Others.

In most cases, funds are financed by a variety of sources. In the old member states funds are usually provided by a mixture of contributions from responsible ministries (mainly Ministry of Economy, Environment or Energy) and revenues from energy-related taxes or carbon allowances. These sources are also common in the new member states but EU Structural Funds as grants, together with loans from IFIs and bilateral state donors, play an even more important role.

One example of a broadly sourced fund is the EcoFund, set up 1993 in Slovenia. Its funding includes revenues from the Privatisation Fund, from environmental penalties and taxes as well as a World Bank loan and grants from the EU.

In Slovakia a fund with a focus on energy efficiency and other energy investments was set up with donors from other EU MS and the EU in return for closing down a nuclear power plant (Bohunice International Decommissioning Fund). In addition, the State Housing Development Fund is also active in financing efficiency measures. This fund is financed from the state budget but is a separate fund. As Slovakia receives significant funding from the EU Social Funds, EBRD, Norway and the EEA Financial Mechanism for efficiency measures, one could assume that they also indirectly source these activities. Finally SPP, the half-privatised gas import and supply company, set up another fund (Ekofond) with special focus on energy efficiency in housing, housing blocks and public buildings.

6.5. Voluntary agreementsThese are a way of restricting government concessions to groups of private companies which are willing to commit to an EE agreement, without the need to implement legislation. There are many examples of these in the NEEAPs of old MS and several other countries with over 10 years experience of such agreements, mainly the Nordic countries, the Netherlands and Germany. Other old MS have adopted voluntary agreements in recent years, for example Austria and Ireland.42 They have also been adopted in Romania (cement, glass and car industries), using assistance from the Netherlands.

Groups of companies in the same sector (e.g. food processing, car factories, heavy industry), usually with the assistance of their trade association, agree with the national government, a municipality or a utility with a legal obligation, that they will all invest to meet an energy reduction target. They also agree to provide monitoring and verification information. In exchange they obtain preferential finance, incentives, or tax reductions and free advice. This has benefits for the whole sector as, usually, energy-efficiency improvements come from modernisation of equipment and therefore also result in an improvement of product quality and range, and support export development. From a strategic point of view, voluntary agreements avoid state regulations, allowing companies to choose measures which can be implemented at low cost (which in turn could be an advantage compared to foreign competitors). As long as targets are reached, voluntary agreements are the best solutions for both sides. If the sector fails to reach the targets, a state regulation will be introduced which not only will define targets but in most cases also the measures which have to be used.

{ }[ ]


{ } [ ]

Meeting the commitments for energy efficiency requires a stronger role for national governments than before. Whereas in the past most of the financing was realised on a bilateral level between IFIs and the private sector (including involvement of local banks), more actions from states are now expected to ensure the exem-plary role of the public sector and to fill the gaps in private sector funding From a strategic point of view,

voluntary agreements avoid state regulations, allowing companies to choose measures which can be implemented at low cost. Suitable sectors for agreements

in the Western Balkans could be supermarkets, hotel groups, firms with large data-processing facilities, food

processing, agriculture, etc.

42 EC/IE (2010a) provides an overview of implemented voluntary agreements in the EU until 2010.

41

Advice on relevant technology can be provided via the trade association. The monitoring and verification data enables the benchmarking of companies into a “league table” so that publicity can be given to the winners (and the losers are more aware of their position). At the same time, individual companies know what changes their competitors are planning. However, usually data is published on a sectoral level and not on an individual company level.

Suitable sectors for agreements in the Western Balkans could be supermarkets, hotel groups, firms with large data-processing facilities, food processing, agriculture or areas of SME where the Ministry of Economy wishes to promote modernisation.

Voluntary agreements are also possible with groups of private landlords or housing associations (e.g. Ireland or the UK). Also, large infrastructure operators could be good partners for voluntary agreements, especially in such cases where the state holds all or part of the shares (e.g. agreement for Deutsche Bahn (railway operator) in Germany).

Additionally, some countries (such as Denmark or Ireland) implement their energy-savings obligation scheme on a basis of voluntary agreements with energy supply companies.

6.6. Non-financial incentives

Non-financial incentives take many forms – from expedited permitting for green building plans (Chicago, U.S.), to “lucky draw” entries for purchase of energy efficient appliances (Vietnam), to “fame and shame” reporting on the highest and lowest performers (Lviv, Ukraine), to a new proposal allowing construction firms to add an additional apartment floor for sale in return for EE measures in the building (Serbia).

Other ideas:

• Voluntary schemes whereby big companies reduce their emissions and energy consumption as a way of promoting their corporate image and social responsibility;

• Buildings: derogation (increase) on the maximum surface for construction of new EE buildings, creation of professional associations and labels for EE contractors;

• Transport: increasing public awareness (“mobility week”, car sharing), reduction of speed limits on motorways, creating awareness of efficient driving when obtaining driving licence;

• Financial products: creation of a specific private savings account that entitles to discounted interest rates on loans for EE investments after a certain number of years;

• Inclusion of public-awareness message on all ads relating to energy products.

However, some French reports show that the revenue-neutral incentives (bonus/penalty system) can in fact cost money because of their popularity (more bonuses have been distributed than penalties collected) hence it is being revised.

Examples of other non-financial incentives to energy savings in the Western Balkans are set out in the boxes below.

Energy consumption monitoring in SerbiaSome municipalities in Serbia have introduced annual reporting on energy consumption for public buildings such as schools, administration, etc. while raising awareness about simple energy-savings measures such as switching lights and computers off at night, closing windows, etc. The focus on reporting has encouraged savings that have served to finance investments in street lighting and other EE equipment. In addition, municipalities over 20,000 inhabitants are now required to have an energy manager, a person responsible for monitoring energy consumption and encouraging energy savings.

Municipalities Action Plans in Bosnia and Herzegovina A number of Western Balkans municipalities have signed up to the Covenant of Mayors and developed Sustainable Energy Actions Plans, in particular in Bosnia and Herzegovina where 14 towns are part of the scheme. These plans are designed as strategic policy documents setting targets and defining measures to achieve, on average for Bosnia and Herzegovina, 20% reduction in CO2 emissions. Municipalities are supported through the process by the Covenant of Mayors and in Republika Sprska by UNDP. NALAS, the Network of Associations of Local Authorities in Southeast Europe, also provide supports to its members and has established a Task Force on Energy Efficiency.

More information: www.covenantofmayors.eu and www.nalas.eu

42

43

7 PuBliC inSTiTuTionS To PromoTE EnErgy EFFiCiEnCy

7.1. Energy-efficiency agency

According to Directive 2006/32/EC, states need to appoint one or more new or existing authorities to be responsible for all issues relevant to energy-efficiency policy (such as monitoring, evaluation of measures, preparation of NEEAPs, etc.). Whereas in principle these tasks can be fulfilled by a ministry or existing regulator, the preferred option has been to create a new institution: usually called an energy-efficiency agency.

The agency can coordinate between the various ministries and other public authorities (e.g. municipalities) of relevance to energy efficiency. It can bundle historically fragmented competences and act as an independent player with no other interest than promoting energy efficiency (whereas existing institutions usually have other interests).

Typical tasks of an energy-efficiency agency (besides the monitoring and reporting requirements as defined by the Directive) are:

• bundling expertise and responsibilities, especially for public authorities and municipalities;

• coordinating between the ministries;

• managing a public energy-efficiency fund;

• designing and implementing new programmes;

• conducting information campaigns;












Financialmechanisms



Fiscalmechanisms

Deliverymechanisms


• Public ESCOsInstitutions • Energy-efficiency agencies

• Public ESCOs

44

• organising training for operators of public buildings and energy consultants;

• providing an information platform or network for energy service companies;

• acting as a think tank;

• coordinating with IFIs.

Most EU member states have established more or less influential energy agencies.43 In the Western Balkans many Contracting Parties have already set up a national agency or at least plan to establish such an institution. To be fully operational, such an agency needs to be staffed properly and provided with sufficient financial resources. Especially in the start-up phase, this means not only capital but also the resources to train staff. Annual funding should be adequate to include a sustained (not occasional) public information campaign. Furthermore, local information centres seem to be helpful tools to reach consumers and penetrate the market.

7.2. Public ESCO

As stated above, an important measure for countries to boost the market for energy efficiency is to enforce legal and market conditions for energy service companies. However, in some countries only limited or insufficient measures have been taken, so that in these countries the ESCO market lags behind expectations. Only half of the EU MS have taken serious actions towards promoting ESCOs. The most developed markets are Germany, France, Italy, the UK and to some extent the Netherlands and Sweden. Most other markets, especially in the new EU MS, are relatively poorly developed.44

One option to get the ESCO market started is the foundation of a public ESCO, or a Super ESCO. Such an ESCO can be a demonstration project in countries without any ESCO activity or, if private companies are already present, can target those sectors not covered sufficiently by the existing companies (mainly public sector). A public ESCO can operate relatively independently of the state budget once it is set up with sufficient start-up capital (perhaps from an IFI) as only some guarantees are needed.

To date, several countries have established public ESCOs: Belgium (Fedesco), Finland (Motiva) and Croatia (HEP-ESCO).45 In these countries, the public ESCOs have helped to develop the overall ESCO market. Besides its core business of performing energy-efficiency projects in the public sector, Fedesco organised the foundation of an ESCO network (Belesco) and set up several awareness campaigns. Before the implementation of Fedesco in 2005, no ESCO market existed in Belgium but a small but growing private ESCO market now exists. In Croatia the ESCO market is still small even after HEP-ESCO’s start-up but nevertheless it is the most advanced in South Eastern Europe.46

However, care must be taken as preferential treatment of public ESCOs (i.e. access to preferential financing terms or bypassing of procurement laws) can result in less economic energy-efficiency investments due to reduced competition. It may in fact hinder the development of a proper ESCO market and energy efficiency, rather than promote it. Thus the legal framework (procurement law) for ESCO projects managed through private sector ESCOs should be put in place in any case.

43 In total there are 19, of which 10 are in the old member states and nine in the new. See NEEAPs for further descriptions. 44 See CRES (2011).45 An overview of the activities of these companies can be found on their websites: www.fedesco.be, www.motiva.fi and www.hep.hr. 46 JRC/IE (2010) provides ESCO market country profiles for EU members and other countries.

{ } [ ]


{ }[ ]

Meeting the commitments for energy efficiency requires a stronger role for national governments than before. Whereas in the past most of the financing was realised on a bilateral level between IFIs and the private sector (including involvement of local banks), more actions from states are now expected to ensure the exem-plary role of the public sector and to fill the gaps in private sector fundingOne option to get the ESCO market

started is the foundation of a public ESCO, such as HEP-ESCO set up in

Croatia. However, the legal framework (procurement law) for projects

managed through private sector ESCOs should be put in place in any case.

45

8 kEy iSSuES For govErnmEnTS in dESigning ThE nExT nEEaPS

This final section of the report highlights some of the issues governments need to consider as they determine how best to finance EE measures that can allow them to meet their commitments under the ECT and to contribute to socioeconomic growth in their countries. It also gives some suggestions for what may be suitable and effective, but the level of stimulus and amount of incentive will depend on each country, its priority energy consumers and the availability of government or donor funds.

The key issues for designing the next NEEAPs involve identifying the most important target groups for the NEEAP and finding the most effective way to stimulate energy savings and to provide incentives for the relevant target groups. In general funds to finance EE measures are available- often, the difficulty is to persuade consumers to use the funds, or to persuade banks that consumers (or governments) are bankable.

An important consideration is the need for long-term planning. This is necessary to change behaviour and to change the current stock of energy-wasteful buildings, machinery and technical processes. To implement a full programme of energy-efficiency measures (particularly in buildings) will take at least a decade, bearing in mind that new buildings meeting higher standards replace only about 10% of the building stock each year, even when construction is not restricted by a lack of finance.

{ }[ ]


{ } [ ]

Meeting the commitments for energy efficiency requires a stronger role for national governments than before. Whereas in the past most of the financing was realised on a bilateral level between IFIs and the private sector (including involvement of local banks), more actions from states are now expected to ensure the exem-plary role of the public sector and to fill the gaps in private sector funding An important consideration

is the need for long-term planning as it is necessary to change

behaviour and to change the current stock of energy-wasteful buildings,

machinery and technical processes. To implement a full programme

of energy-efficiency measures will take at least a decade

46

Examples of the stimulus to change include energy price rises or energy taxes and more public information campaigns, so people are more aware of the issue. Incentives can be government grants for the preferred type of measure, or lower rates of VAT for some types of equipment. These should apply for only a short time to allow the market to develop. Once the benefits are clearly established, and commercial finance is more readily available, the incentives can be withdrawn.

Finally contributions from the state budget will be needed to operate the plan, to meet the fixed costs of the energy agency or other bodies, but should increasingly be used for investment projects themselves.

8.1. Scaling up EE investments

An important issue for governments is that of scaling up, since relying on IFIs and donor funds will be unsustainable, and will be unable to generate the level of funds to meet the government’s commitments. Key constraints to scaling up efforts are:

• No recycling of funding, no leverage;

• No repayment obligations by end users;

• Limited progress with bringing in commercial financing, ESCO development, etc.;

• Use of centralized implementation models (e.g., Project Implementation Units within line ministries) with limited scalability;

• Low pace and scale of buildings retrofits e.g. only 20-30 public buildings retrofitted per year;

• Not achieving measurable contributions to NEEAP targets;

• Persistent informational, technical, financial and behavioural barriers across a diverse range of stakeholders.

Therefore in order to develop further, NEEAPs need to plan for scaling up in future, with a larger range of financing options. Examples of EU Member States’ use of funds are shown in Table 9.

Public

Residential

Commercial

Commercial bank financing

Bulgaria Germany HungaryPolandSlovakiaSpain

AustriaBelgiumBulgariaCzech RepublicGermany Lithuania Netherlands U.K.Romania Spain

Bulgaria FranceGermany HungaryPolandRomania Slovakia SpainU.K.

PublicESCO

ArmeniaBelgiumCroatiaPolandUkraineFinland

--

--

EE Revolving Funds

BulgariaGreeceRomaniaSlovenia

BulgariaGreeceRomaniaSlovenia

BulgariaFranceGermanyHungaryRomania

Utilityprograms

Denmark France ItalyNetherlandsU.K.

Belgium, DenmarkFranceIrelandItalyNetherlandsU.K.

BelgiumDenmarkFranceIrelandItalyU.K.

Table 9 Financial mechanisms used in Eu member States.

Source: world Bank

47

In the early stages of scaling up, only a few types of finance will be available in the Western Balkans but as the market develops, a wide range is possible as shown in Figure 9.

8.2. Typical Packages

For each type of energy consumer a package of stimulus, funds and incentives (as shown in the diagrams below) should be developed.

Municipal bonds

Commercial loans

Lease of assets

Vendor credit

Credit/risk guarantees

Dedicated credit lines

Energy efficiency funds

Budget capture

General budget

Grants

Budget financing

EE funds

Public support

Commercialfinancing

Use of commercial financing

consumer

funds

incentive

stimulus

Figure 9 moving to commercial finance for EE

Figure 10 a typical package of measures to promote energy efficiency

Source: world Bank

48

NEEAPs should incorporate a properly planned sequence of government measures, for which Table 10 below could be an example, though timescales in the early stages could be longer. Attention is drawn to the need to identify sources of funding well before such finance is needed, and the need to prepare projects to use the funding. Financial resources in the first NEEAP was mainly used for public campaigns and training, and investments were not quantified nor sources identified. This will be especially important for the second NEEAP, as the transposition of legislation is now mostly complete and EE projects need preparation and funding.

Furthermore, IFI and donor support is limited in terms of scale, scope and duration. It is, therefore, necessary for governments to make sure that the private sector is adequately stimulated to provide finance and to create a market for energy services for the later stages of implementation of energy-efficiency plans.

8.3. Issues for government as a whole

Some general issues should be discussed at government level, so that the overall parameters can be set.

why does energy efficiency matter at government level?

Few countries in the Western Balkans have their own clean energy resources, so increasingly they will become dependent on imports. What does this mean for energy security, and the balance of payments?

Should new capacity for the growth of the energy sector be funded as the economy expands? Should the link between economic growth and growth of energy demand be broken, by funding energy efficiency as part of economic growth and modernisation? This is quite a different question to “should the energy sector reduce the cost of energy to consumers by replacing old capacity and becoming more efficient?” The latter should be a priority in any case.

what are the benefits to the economy created by energy-efficiency measures?

Energy-efficiency measures provide various benefits for the economy and society as a whole and for public finance in particular.

Barrier removal

Public awareness

Legislation

Training

Arrange donnor suport; Allocate Funding from Budget

Full Implementation

ImplementationProjects

Monitoring and verification

Year 1

Identification

Campaign

Draft primary legislation

For campaigns, legal drafting and project preparation

Year 2

Removal by legislation

Campaign

Approve legislation

Planning


Preparation

Year 3

Campaign

Training


Spend budget funds

Implementation

First set of projects

Year 4

Result Campaign

Training


Spend budget funds

Preparation

Year 5

Campaign

Training


Spend budget funds

Implementation

Second set of projects

Years 5-10

Check for oth-er problems and correct

Result Campaign


Spend budget funds

Preparation/implementation

Each set and total results

Table 10 Planning for nEEaP activities

49

From a public policy perspective some benefits are of special interest:

• Employment: Efficiency measures are reported to have significant impacts on job creation. Even if the literature shows a wide range for the actual effect, all show a clear positive effect. Most studies indicate figures between 17 and 90 jobs created by every €1 million spent in energy efficiency.48

• Tax revenues: New jobs and investments increase tax revenues and reduce social security payments. Experiences in Germany show that every €1 spent generates €5 in additional taxes.49

• Reduced public energy expenditures: Public budgets could be reduced with lower energy payments. The public sector is often responsible for buildings and infrastructure elements (e.g. railways) that can have massive energy consumption.

• Reduced energy subsidies: In addition to its own energy demand, the public budget often needs to pay for energy demand in other sectors. This includes direct subsidies to companies, fuel poverty measures for households and subsidies for utilities in countries where energy prices are regulated to price levels below supply costs.

• Reduced import costs: The Western Balkans is highly dependent on oil and gas imports, with more than 50% of fuel and energy imported. This implies that:

I. domestic purchasing power is reduced as money that could increase local consumption is transferred to the foreign export companies and states. The Western Balkans are not alone in this respect (it is estimated that in 2011, the EU spent over €400 billion or 3.3% of EU GDP on energy imports).

II. import dependency may create an energy security issue which means either additional public and private expenditures for strategic storages or a potential loss of production if energy is not delivered (as happened during the 2009 Ukraine gas dispute).

III. from a monetary perspective, energy import is a typical channel for inflation and for the shrinkage of foreign currency reserves.

All of these negative effects could be reduced by energy-efficiency measures.50

• GHG emissions

• Moderated energy prices

• Natural resources management

• Development goals

International

• Job creation

• Reduced energy-related public expenditures

• Energy security

• Macroeconomic effects

National

• Industrial productivity and competitiveness

• Energy provider and infrastructure benefits

• Increased asset values

Sectoral

• Health anvd wellbeing

• Poverty alleviation (energy acces and energy affordability)

• Increased disposable income

Individual

Figure 11 Selected benefits from energy-efficiency measures47

47 IEA (2012a)48 IEA (2012a) gives a literature overview of various estimations on job creation effect. ENE (2009) summarises experiences in the US, which vary in a range of 46 and 66 new jobs for every 1 Mio. Dollars.49 See KfW (2011)50 See E3G (2012)

50

• Lower investments in energy infrastructure: Reduced energy demand (or at least a reduced increase) could make new and expensive infrastructure obsolete. This includes transport infrastructure (e.g. gas import pipelines like Nabucco or Nord Stream or high-voltage power lines) as well as electricity generation capacity.51

what is the best way to fund energy efficiency?

What is the scope for government borrowing? How much is needed in the form of loan financing to meet NEEAP targets? Is it preferable to get external loan financing or create an internal revolving fund from taxes? Should borrowing be done off-public balance sheet through ESCOs? Is multi-annual budgeting in place to facilitate budget capture for short payback period measures?

What changes can be made in taxation and in energy prices to address climate change and environmental issues, and to promote the right investment decisions in the private sector?

How much will it cost to operate the NEEAP (campaigns and training), especially if an energy agency is created (permanent establishment costs)? How will the energy agency be made accountable for its costs and the performance of the NEEAP? This can be appropriately funded from taxation, if the performance is monitored.

how much can energy prices rise, and how can we remove energy price controls to send better signals to consumers (once price regulation is removed in stages)?

Plans need to be made for this, especially with regard to protection of vulnerable customers. Subsidies for energy prices need to be transferred to social security payments. Another method is to directly fund appropriate energy-efficiency measures which specifically target those customers, since the poorest customers generally live in the worst quality housing, use the highest cost fuels or the least efficient heating equipment.

Funding at national or municipal level?

In some countries, services are managed at national level, in others at municipal level. This may restrict the funds available for borrowing. Smaller municipalities often have neither the skills nor the finance to manage their own improvements but these are still needed. Can their projects be grouped and financed as a package? Could a national energy agency or a public ESCO help with providing expertise and managing procurements?

what are the targets for each sector of the economy?

In order to make the NEEAP operational, the overall target of 9% savings needs to be disaggregated to individual sectors and groups of the economy, and the appropriate measures specified for each sector. This will depend on the economy in each country. What are the most important sectors for the government? Fuel poverty affects vulnerable customers more seriously than better-off consumers, so EE measures which help them are necessary but also good for votes, showing that the government cares for them.

Energy price subsidies for national champions to keep them competitive

How can the state strike a balance between supporting the efforts of large enterprises to remain cost competitive in global markets and not distorting the energy price for other consumers? Do they have a long-term future, compared to their international competitors? Or is this just a way of subsidising jobs? How can governments ensure that they become more energy efficient so that they do not need subsidies?

51 The wholesale price of electricity where the investment cost of new or replacement capacity is already included = 75 €/MWh (EU power exchanges). The price of energy efficiency investments = 20€/MWh (EBRD and analyses of obligation schemes shown above). So it is cheaper to make energy savings rather than pay for new capacity.

51

8.4. Issues for incentivising the private sector to make EE investments

Here the aim is to persuade the private sector to make investment decisions to save money in enterprises and households. Although this may seem always to be in their interest, the timing and size of investment decisions depends on many factors other than just the need to save money on one particular cost, which may not always appear to be a significant part of annual expenses. So the combination of measures should aim to improve awareness and bring forward or reduce the risk for investment decisions.

8.4.1. Industry/SMEs

Generally there is ample funding in terms of loans, either directly from IFIs for bigger firms or via credit lines with local banks for smaller firms. In practice, EE credit line funds tend to be compared with SME funds that are often easier to obtain for new equipment or modernisation. Voluntary agreements in a specific priority sector can be a way to improve the energy performance of all the companies in the sector, without the need for further legislation.

It is important that incentives provided by IFIs intended for consumers actually reach them and are not absorbed by banks as a way of increasing their profits. In some cases, banks assess customers based on revenue and collateral, rather than the EE project’s potential to pay back the loan through the savings achieved. Firms need specialised technical assistance to identify EE projects and this should be part of the overall package. Banks must build this TA into the product they offer as the skills required necessitate external expertise. At present, EE loans probably need a reduced interest rate, otherwise there will be no incentive to take the more time-consuming route of an EE loan. An incentive grant to the end user that effectively reduces the amount to be borrowed can be a useful way to “kick start” such EE credit lines but ideally the amount of incentive required should decrease over time as consumers become more aware of the benefits of EE investment. Information campaigns could target specific industries which are the focus of technical change, consolidation or modernisation, with more specific messages about particular solutions.

8.4.2. Single family households

Here a decision must be taken as to which households are targeted. Vulnerable customers might be targeted with bigger grants or fully funded measures either by a utility obligation or a government loan from an IFI. For better-off households, a VAT reduction on products such as solar water heating may be more suitable. Incentives could also cover new cars. For these small loans, e.g. for condensing boilers, Class A kitchen equipment or solar water heating, procedures should not be more complex than for a normal loan for a household. Public information campaigns using mass media, particularly stressing the advantages of EE equipment and how to find it, will be necessary.

Figure 12 Suggested measures for industry


Price rise

Public information

IFIdirectlending

Grants

VAT reductionon selectedproducts

Tax rebates for investments

Technicalassistance

IFI Credit LinesLocal banks

Industry SMEs

IFIs Grants

52

8.4.3. Housing associations

This is an important area to target, as it generally forms the majority of housing in urban areas, and only a small part of the existing building stock is replaced each year. The problems in improving energy efficiency are usually related to legal and organisational issues, which need to be addressed through the statutes of housing associations or through a more general regulation, so that available funds can be borrowed either jointly or individually. Each housing association (or its members), will have to be assessed for creditworthiness, and this may also need additional regulation by governments.

Usually, housing associations collect funds to carry out maintenance and repairs and may also borrow on behalf of their members. Majority decision-making needs to be permitted, to enable projects to go ahead. A possible solution is to attach loans to the property rather than the owner, so that longer term loans can be negotiated and transferred when properties are sold. Vulnerable customers, who perhaps are not willing or able to take loans, need to have special provision, either from the state, via grants or full cost coverage, or by spreading the cost over other occupants of the block, as a way making progress for all. ESCOs can prove useful for such EE activities, either as the contractor designing and carrying out the investment directly for the housing association, or for a utility operating an obligation scheme.

Stimulus Credit Line Incentives

Price rise

Public information

Labelling

Fuel tax

Loans fromlocal banks

Governmentgrant

VAT reduction on selected products

SingleFamily

Household

(IFIs)


Price rise

Utility obligation Pay as you save

Public information

Labelling

Government grantfor specific measures

Subsidy forvulnerable customers

Tax rebate

Social security payments

ESCO ?

Housing association

will includevulnerable customers

(IFIs) Grants

IFI loans

Local banks

Figure 13 Suggested measures for single family households

Figure 14 Suggested measures for housing associations

53

A quite complex package of incentives may be needed for this case, as seen in the diagram, in particular to overcome the organisational issues. Special promotion and training may be needed for housing associations.

8.4.4. Private transport

Here the main aim will be to get firms to modernise their vehicle fleets, either by changing the fuel or buying new hybrid or electric vehicles. The stimulus of an increased fuel or CO2 tax could be effective together with tax rebates for these changes.

8.5. Issues for Incentivising EE Investments in the Public sector

8.5.1. Ministries/Municipalities with large numbers of buildings (including social housing)



Public information

Credit Lines

Local Banks

VAT reduction on new vehicle


Privatevehiclefleets

IFIs


Price rise

Public information

NEEAP targets

Reduced budget allocations

Leading role of the public sector

Covenant of mayors

Statebudgetcontribution(budgetcapture)

IFI/EC grants

TechnicalAssistance

Creditlines

Localbanks

ESCO

IFIs

Directborowing

Lineministries

MunicipalitiesBuilding

operators

IFIs Grants

Figure 15 Suggested measures for private transport

Figure 16 Suggested measures for public sector buildings

54

Planning for a longer life for building assets

Energy-efficiency measures are not the only improvements that are needed for buildings, and other improvements should be done at the same time. Who will finance the other improvements that are needed but do not count as energy-efficiency improvements and generate no savings to offset the cost of the work?

Is there an inventory of public buildings? How many are fit for purpose and how many need major upgrades for a 30-year life in the 21st century? Are the buildings (schools, hospitals, etc.) in the right place to serve the future populations? Is there a need to consolidate rural schools, for example, as more people move to towns? Would better facilities result from new buildings or should the old ones be renovated?

8.5.2. Public services (transport, street lighting)

Municipal transport involves both public and private sector measures, e.g. if some bus services are run privately or if it is intended to promote cycle lanes, city bicycles and car sharing.

Municipal enterprises covering transport are easy to address directly by investment but private sector bus services also need to be covered. One way to do this could be to provide licences for operating bus routes only to energy-efficient vehicles.

8.5.3. Public utilities (water, district heating, electricity distribution)

These public utilities are usually big enough to borrow directly from IFIs, but may need sovereign guarantees.



NEEAP targets

Covenant of Mayors

Direct borowing EC grants

Technical assistance


Publictransport

IFIs/EC Grants


Preassure from GOVas owner to producemore efficiently (targets?)

Legal obligation andtarget for savingby consumers

Regulatiory supervision

Price rise

Subsidies for investments forvulnerable customers

Technical Assistanceby public ESCO

PublicEnergyUtilities

(IFIs) Grants

Figure 17 Suggested measures for public services

Figure 18 Suggested measures for public energy utilities

56

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annEx aExPEriEnCES wiTh oBligaTion SChEmES UK obligation schemesThe UK52 has a long history in defining energy-efficiency targets and setting up programmes and measures, including measures that also create jobs. Since the early 1990s, various national strategies and laws have been implemented. The Climate Change Act 2008 introduced an obligation scheme for energy companies. This programme called CERT (Carbon Emission Reduction Target) is one out of many programmes put in place and it ended in December 2012 and was replaced by a new programme obligations programme “Green Deal” that has recently come on-stream.

CERT obliged gas and electricity suppliers to reduce in total 293 Mt CO2 (“lifetime”, i.e. cumulated over the lifetime of an investment). All savings have to be realised in the household sector. This target includes some constraints such as a certain percentage of insulation needs to be included (68%) as well as a special focus on fuel poverty (40% in low-income households). In principle all kinds of fuels are allowable but since 2010 some “low-hanging fruit measures” like energy-saving lamps are excluded. The individual measures need to be realised with licensed energy service companies, and cooperation with local authorities and housing associations is also of importance. The energy regulator OFGEM monitors the process and can set fines for obliged companies not meeting their target, of up to 10% of their yearly revenue (no buy-out possible). CERT offers the possibility to trade bilaterally between the obliged companies (but not with other parties). The costs are allocated partly to the households (low or no own-contribution for social housing and low incomes) and the remainder is allocated to the energy prices of the companies.

In principle, CERT can be evaluated positively. It seems that the programme will meet its (comparably ambitious) target by the end of 2012.53 Most savings were achieved from the gas sector (around 60%), followed by electricity (more than 20%) and others (such as district heating).54 From the finance side, CERT is, compared to other European mechanisms where data is available, cost effective with relatively small contributions from the state.55 Most costs are allocated to the sector which benefits.

However, some critical issues also arise:

• While in principle the “household” itself pays the most for its own benefits, redistribution effects within the sector are apparent (everyone pays higher energy prices even if no measures are installed in their house, plus strong preferential treatment of low-income households);

• Restricted focus on few technologies (especially insulation56) reduces the technical innovation potential;

• Low-cost programmes with energy-saving potential, especially in programme focus (low-income household, insulation), seem to be gradually exhausted;

• Practically no trading activity between companies hinders further benefits from a trading system.

Based on this, the UK has adopted a new law (Energy Act 2011) which introduces a new instrument mix as a successor for CERT.

The adoption of the new law at the beginning of 2013 brings changes to a pure obligation scheme by adding market incentive elements to the system. The programme called “Green Deal” focuses on measures with comparably low investment costs and short payback periods (based on a “golden rule”). These measures will be financed

52 For reasons of simplicity this section refers to the UK, even if some programmes are not available in the whole United Kingdom but only in Great Britain or England.53 This is valid for all major UK programmes, most of which actually had an over-fulfilment (e.g. EEC2 (2005–2008) +40% above target).54 Bertoldi et al. (2010).55 See next section for further details.56 This is possibly due to the highly standardised design and the prevalence of single-family houses in the UK.

58

upfront by a “Green Deal provider” (actually an ESCO) and paid back from the savings gained on a monthly basis. An interesting new element of Green Deal is that the payback obligation is in relation to the house itself and not the owner or tenant. This means that if a house is sold or a new tenant moves in, they have to take over the payback obligations. This seems to be an elegant solution to the typical “landlord/tenant-problem” which often occurs in relation to energy-efficiency investments and which should also be suitable for housing associations in the Western Balkans.

For measures with high investment costs, long payback periods and for social housing or low-income households, another programme began in 2013: “ECO” (Energy Company Obligation). ECO has more or less the same design as CERT and has an obligation to reduce 0.52 Mt CO2 per year. In addition, £3.4 billion (€4.25 billion) of heating costs should be saved over the lifetime of the programme (until end of 2015).

Cost efficiency of selected European obligation programmesThis section provides some information on the cost aspects of obligation programmes applied in EU MS. In principle, data availability is rather poor so the data presented is more indicative rather than giving firm conclusions. Even with those measures where data is presented one needs to be very careful with comparisons. This is due to the different approaches in calculating costs and savings, and to the different development phases of the efficiency mechanisms. Some countries have been implementing efficiency programmes for more than 20 years (e.g. Germany, UK), meaning that the measures with the lowest costs and highest saving potential (or better: highest cost efficiency) have already been realised in the past. Measures covered by the recent programmes, therefore, need to focus on more complex measures with higher costs. Other countries (mainly the new MS) have not implemented as many measures in the past, meaning their recent programmes tend to be more cost efficient.

uk57

There is no cost information on CERT available so far but estimations for EE2, a forerunner for 2005–2008 with comparable mechanisms, are available. The total investment costs for obliged companies amounted to €1,280 million. For an economic evaluation these costs need to be complemented by other costs in relation to the measures. These are: direct costs by the customers, e.g. for own contribution (325 M€); and grants from the state for measures in social housing and low-income houses (153 M€). By comparing the total costs of €1,758 million with the realised energy saved of 192 TWh, a price of 0.91 ct/kWh saved energy results. Compared with an electricity price level of 13.9 ct/kWh in the UK for the years mentioned above, it is obvious that the programme was of great social benefit. When focusing on gas, which is the main heating source in the UK, the avoidance costs are around 0.5 ct/kWh saved, compared to a gas price of 3.7 ct/kWh. Another indicator is the costs per avoided ton of CO2, which are 24 €/t.58

France59

As in the UK, France also implemented an obligation scheme for energy companies. After adopting the law (Loi de programmation et d’orientation de la politique energetique, 2005) a first phase of obligations including a trading scheme for White Certificates was started (2006–mid-2009). After a transition period of two years without legal obligations, a second phase started (mid-2011–2013). In addition to electricity and gas suppliers, fuel and motor oil suppliers also have obligations under the law and investments in all sectors are allowed (except those participating on the ETS).60 The target for the second phase is 345 TWh cumulative, (a special unit which considers saved energy over the lifetime of the investment including a discount factor) of which approximately a quarter needs to be achieved from fuel suppliers. Phase 2 includes the option for bilateral trading of certificates between obliged parties as well as a buy-out price of 2 ct/kWh if obligations are not met.

In practice, the system has faced some obstacles. Even if all sectors are open to fulfilling the obligations, more than 80% are realised in the household sector (more than 60% by a change of boilers). The costs are allocated to the customer who benefits (own contribution), partly to the (regulated) energy prices and the remainder to the obliged companies. These costs can be recovered from a tax reduction scheme. When comparing the cost structure and the efficiency with the UK system, some differences can be observed. First, in contrast to the UK (and most other countries using obligation schemes) the majority of costs are covered by the state budget.61 Furthermore, the total avoidance costs including administration, marketing and tax refunds (for 2006–2009) are significantly higher than in the UK: 3.74 ct/kWh (i.e. four times higher), of which only 0.39 ct/kWh are costs for obliged parties (which in turn is less than half of the UK costs).

57 See CIRED (2011).58 This is actually higher than the recent CO2 certificate prices (8 €/t as of mid-August 2012) but significantly lower than the esti-mated avoidance costs for sectors outside the ETS of 60 €/t. 59 See CIRED (2011) and Fraunhofer/Ecofys/Öko-Institut (2012).60 However, most savings were delivered by gas and electricity in the residential sector. Other sectors and/or fuels only contribute to around 14% of the achieved savings. Especially the contribution of the transport sector was negligible (0.4%). See Bertoldi et al. (2010).61 Data from Phase 1 shows that 1,305 M€ is covered by the state budget, 504 M€ by the customers and only 210 M€ by the obliged parties (and in turn, from their customers via energy price increase).

59

denmark62 Denmark has also had an obligation scheme for energy companies (electricity, gas and district heating network operators) in place since 2005. The system is based on a voluntary industry agreement and has a reduction target of 1.6 TWh per year (which is around 60% of the annual national saving target). The system is reported to be very effective as it has exceeded its targets (2011: 2.1 TWh) with extremely low administrative costs (around €90,000 per year). The measures focus mainly on industry projects (>50%) with high saving potentials, which is in contrast to most other obligation schemes (and most other mechanisms) that mainly target households.63 The overall avoidance costs are 5 ct/kWh, but it must be noted that the Danish system has different calculation methods to the British or French. The latter include (different forms of) lifetime savings of an investment (e.g. 1 kWh saved over 10 years = 10 kWh accumulated, and then modified with a discount) whereas the Danish system only includes the savings of the first year (i.e. 1 kWh = 1 kWh).64 Taking this into account, the Danish costs are below the UK ones, indicative 0.6 ct/kWh. The low costs reflect the low administrative costs and the high share of large-scale industry measures.

Obligations compared to other instrumentsIn contrast to obligation schemes for which there is substantial literature on costs, traditional instruments are only poorly evaluated (from the cost perspective). In those limited cases where data is available different approaches are used, making it complicated to compare. However, some useful examples can be found:65

• Germany (KfW Energy-Efficient Rehabilitation Programme): this programme was introduced in 2002 and provides preferential loans combined with grants for residential buildings. The cost effectiveness is reported to be 25 €/t CO2.

• Czech Republic (Green Savings Programme): this subsidy is focused on insulation and renewables, heating and hot water preparation in existing or new residential buildings and includes apartment complexes. Its cost-effectiveness is reported to be 20 €/t CO2.

• Spain (Support Programme for Energy-Efficient Buildings): this grant and loan programme targets existing residential and public buildings. The CO2 abatement costs are estimated at 23 €/t CO2.

However, the cost data only includes the costs for the state budget and therefore the figures cannot be directly compared with the data for obligation schemes. This is because cost evaluations for obligation schemes usually include costs for all parties (e.g. the obliged companies, customers and the state). At first glance, the costs for the UK CERT system (24 €/t CO2) are in line with those described above. But it needs to be remembered that they include, in addition to the state’s costs, the costs for the obliged parties and the customers also. With reference to the cost distribution, CERT’s costs for the state budget could be assumed to be only around 2 €/t CO2.

Other countries provided obligations to a wider group of customers including industrial firms as illustrated below.

Italy 2005-2007

France 2006-2009

UK 2005-2008

Denmark

Residential Buildings (elec and thermal)

Tertiary (elec and thermal)

Industry Transport Other

59% electrical use in buildings

21% thermal uses in buildings

50% trade and industry

8% public sector

14% (public lighting and

supply options)

1.3% (district heating)

NA

NA

0%

0.4%

NA

NA

6%

7.4%

NA

86.7%

100%

42%

4.3%

NA

Table 11 Savings delivered by end-use sector.

62 See DEA (2012)63 Whereas other countries realised their savings mainly in the gas and electricity sector, the savings in Denmark are split nearly equal to gas, electricity, oil and district heating. See Bertoldi et al. (2010).64 Fraunhofer/Ecofys/Öko-Institut (2012) provides calculation examples for making the different approaches compatible.65 See EuroACE (2010)

Source: Bertoldi 2010 Table 1.

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Financing Energy Efficiencyin the Western Balkans - Public financing options for NEEAPs

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