Preliminary Proposal Table 3.13 Typical Barriers to Public Sector Sustainable Energy Investments

Table 3.13 Typical Barriers to Public Sector Sustainable Energy Investments

POLICY AND PUBLIC END USERS EQUIPMENT AND SERVICE PROVIDERS FINANCIERS REGULATORY BARRIERS

• Low-energy pricing or • No incentive to change or take risk • Higher transaction costs for public • High perceived public collections • No discretionary budget for sector projects credit risk • Procurement policies upgrades or special projects • Concerns over late or no payment • New technologies (lowest cost, defi ned • Unclear about ownership of cost • High project development costs • New contractual mechanisms project, unbundled and energy savings • Limited technical, business, and risk • Small sizes and high services) • Weak technical ability to management skills transaction costs • Annual budget cycles assess options • Low track record in the market for • High perceived risks may not allow multiyear • Behavioral biases new contractual models • Behavioral biases contracting • Ad hoc planning

Source: Author compilation (Jas Singh).

assertive and involved in decisions that aff ect energy demand and supply options. City governments need to become stronger partners of regional and national governments and to guide and mobilize private sector participation. Most important, cities need to act within their own authority to implement sustainable energy solutions.

Energy effi ciency and renewable energy solutions in the public sector

Energy costs often constitute a signifi cant portion of the operating budget of city governments. In the State of California, for instance, energy is the second largest expenditure item in city government operations, after employee salaries and benefi ts (Lantsberg 2005). The share of public sector consumption is particularly high in electricity and heating. The public sector accounts for 9 percent of Brazil’s electricity use. Public agencies account for 20 percent of Eastern Europe’s electricity and heating loads, and about 10 percent of the European Union’s electricity and heating demand arises from the public sector.9 As a fi rst step, city governments should consider initiating sustainable energy solutions within city boundaries because this may produce rapid benefi ts and may be implemented more easily. Common targets for improvements include government-owned buildings and facilities; water supply and wastewater treatment; public lighting and traffi c lights; and municipal services such as solid waste management, public transportation, and, in cold climates, district heating.10

Government-owned buildings and facilities: Buildings consume about one-third of global energy and present signifi cant potential for energy savings. Government buildings, particularly those in developing countries, tend to be older and use more ineffi cient equipment, underlining the potential for energy effi ciency gains. Measures to realize gains may focus on building envelopes (windows and insulation), electrical appliances (lighting, pumping, and heating and cooling) and offi ce equipment (computers, copiers, and printers). Though measures are benefi cial, public facilities are often subject to rigid procurement practices that focus heavily on costs and lack discretionary budgets with which to make meaningful improvements. In addition, principal-agent relationships or split incentives complicate investments. For example, a parent budget agency may determine a subsidiary’s capital budget and even specify equipment, despite the subordinate agency’s responsibility for paying monthly energy bills.

Energy effi ciency programs often initially support relatively low-cost modulated measures, such as lighting retrofi ts, or the replacement of old equipment, such as heating, ventilation, and air-conditioning systems. In public building complexes, such as city halls, schools, and hospitals, a whole-building approach may be needed to achieve cost-eff ective control of

the energy budget of a building (annual energy consumption). Moreover, buildings are complex energy systems, and trade-off s are often made to optimize energy effi ciency. For example, planners must evaluate the effi ciency of a heating, ventilation, and air-conditioning system against the thermal pass-through of a building envelope because each option reduces the effectiveness of the other. For new government buildings, the adoption of best practice in sustainable design and construction reduces lifecycle costs and serves as an example for the private sector. A comprehensive analysis of the fi nancial costs and benefi ts of LEED-certifi ed offi ce and school buildings in the United States has found that a minimal up-front investment of about 2 percent of construction costs typically yields (20-year) life-cycle savings of over 10 times the initial investment (Kats 2003).11

Recently, some governments in developing countries have experimented with retrofi tting multiple municipal facilities under common authority. Though this may be more complex, it may also substantially reduce transaction costs and allow for scaled-up investments. In Hungary, for example, the Ministry of Education issued a tender in 2006 for a single consortium to fi nance and retrofi t all the schools in the country under an energy service company contract. The International Finance Corporation provided a portfolio credit guarantee to the winning bidder for up to US$250 million. To date, about US$22 million has been invested in about 200 projects.

Water supply and wastewater treatment: The operation of water and wastewater systems is often the largest outlay in municipal energy budgets. For example, cities in California spend over 50 percent of their energy budgets on water and wastewater pumping (Lantsberg 2005). Estimates suggest that 2 or 3 percent of the world’s energy consumption is devoted to pumping and treating water and that the potential exists for related energy savings of more than 25 percent. In many cities, energy and water are scarce resources, and cities often introduce effi ciency programs to save energy and water simultaneously in light of links between these sectors. In developing countries, water and wastewater systems are often poorly designed, rely on outdated equipment, and suffer from high nonmetered water losses owing to inadequate investment and expertise. Many systems operate without adequate commercial incentives to be effi cient. In light of these obstacles, the Alliance to Save Energy launched Watergy, a program that demonstrates the signifi cant benefi ts of increasing clean water access by reducing energy costs and water losses.12 In Fortaleza, in northeast Brazil, the Alliance to Save Energy worked with the local utility, the Companhia de Água e Esgoto do Ceara, to develop and implement measures to improve water distribution and access to sanitation services, while reducing operating costs and environmental impacts. The local utility invested about R$3 million (about US$1.1 million) in various activities such as the installation of an automatic control system. The utility saved 88 gigawatt hours and US$2.5 million over four years. More important, the utility established an additional 88,000 new connections, while decreasing overall energy costs.

Eff orts to improve energy effi ciency should consider both supply- and demand-side measures and the relevant links. For example, as water leakage and waste are reduced, additional effi ciency gains may be realized by downsizing pumping stations. Other measures should also be considered to boost effi ciency, such as system redesign, pressure management, pump impeller reduction, installation of low-friction pipes and variable speed pumps, load management, power factor improvements, improved maintenance procedures, improved metering, and water recycling. Wastewater treatment plants might also be made more effi cient by recovering waste heat, capturing methane for power generation, and improving pumping systems.