How to stop burning money? Expert overview of the state energy efficiency.policy

HOW TO STOP “BURNING” MONEY EXPERT OVERVIEW OF THE STATE ENERGY EFFICIENCY POLICY

2016

This publication has been issued within the framework of the project “Enhancing impact of civil society in monitoring and policy dialogue on energy and related sectors’ reforms in line with the Association Agreement implementation”, jointly implemented by DiXi Group, Resource & Analysis Center “Society and Environment”, Civil Network “OPORA”, Association “European-Ukrainian Energy Agency” and All-Ukrainian NGO “Energy Association of Ukraine”, with the participation of independent experts.

This project is funded by the European Union. The contents of this publication can under no circumstances be regarded as reflecting the position of the European Union.

This publication was prepared with the support of the European Union. The contents of this publication are the sole responsibility of NGO “DIXI GROUP”, as well as Civil Network “OPORA”, All-Ukrainian NGO “Energy Association of Ukraine”, Resource & Analysis Center “Society and Environment”, Association “European-Ukrainian Energy Agency”, and can under no circumstances be regarded as reflecting the position of the European Union.

This publication has been prepared by experts of NGO “National Ecological Centre of Ukraine”, Civil Network “OPORA”, NGO “Ukrainian Centre for European Policy”, Stronger Together Information Campaign, and DiXi Group with the financial support of the European Union and Heinrich Böll Foundation’s Office in Ukraine.

“BURN” OR INVEST? With the start of the heating season, new high heating and electricity bills have become a most pressing issue in Ukraine.

The Government hopes to mitigate the expected public resentment by means of a largescale social programme of utility and energy subsidies and benefits.

While national natural gas producers are just planning to increase gas production and the risk of interruption of coal supply to TPPs, CHPPs and heat supply companies remains quite high, a substantial amount of this money (around UAH 35 billion was allocated from the 2016 State Budget; UAH 51 billion is planned to be allocated in 2017) will be used to buy imported energy products.

Given an extremely low level of energy saving in Ukraine, implementation of energy efficiency measures can make most of the energy resources consumed by households and business superfluous. It may help save tens of billions of budget funds which can be used to cover the needs of the Army or other social expenditures.

Is energy efficiency among the Government’s current priorities?

According to the analysis of two state support programmes for energy efficient modernization of buildings, one of which may be left without funding starting from January 2017, and the other is far from practical implementation, it is not quite so. There is an obvious imbalance between serious challenges Ukraine faces due to a disastrous level of energy efficiency of buildings and economy and the political will to find the ways to support active citizens wishing to save on their utility bills.

Sky-high demand for “warm” loans, enthusiastic participation in the EBRD-funded IQ Energy Programme, and big hopes for the Energy Efficiency Fund demonstrated by Ukrainians, show that households are ready for large-scale implementation of energy efficiency measures.

The question is whether the Government is ready alike.

3

“WARM” LOANS. WHAT IS THE OUTCOME AND SHOULD IT BE CONTINUED? The Government’s energy efficiency programme, better known as the “warm” loan programme, is the most popular instrument to support households in their implementation of energy efficiency measures. It can be attributed to several factors.

In addition to quite attractive compensation rate (the figure ranged from 20 to 70 percent at different times and for different categories of borrowers), the State offers a handy mechanism for modernization of the parts of buildings that need it most, providing for a relatively high efficiency of investment. In addition, the programme has been implemented for as long as two years. Notwithstanding the interruption of funding in Q3, it is only in 2016 that the programme has gained momentum.

Such dynamics show the importance of step-by-step approach to build up public trust.

Simplicity and familiarity of a loan as a financial instrument and prompt service due to the use of standard terms and conditions and only basic requirements to the borrowers, also contributed to high demand. A relatively small average loan amount (during the period of the programme, loans 4

were raised in most cases by individuals for the purchase of energy efficient equipment and materials, namely window systems) is an advantage and a disadvantage of the programme at the same time.

On the one hand, most households can afford to repay a loan granted for a particular energy efficiency project. On the other hand, such inconsistent approach does not provide for comprehensive energy efficiency solutions and cannot guarantee optimal investment performance.In addition, the weaknesses of the programme include lack of energy certification and audit incentives and related impossibility to track and verify the results of financed activities.

In absolute terms, as of the end of October, 2016, 150,659 “warm” loans for the total amount of over UAH 2,495.6 million were granted within the framework of the programme. Only 1/6 of the loans were granted for the purchase of boilers, and 444 loans were granted to condominiums, while the most popular loan purpose was the purchase of energy efficient equipment and materials by individuals, most often the new windows, for which around 131,000 loans were granted for the total amount of UAH 2.1 billion.

Dynamics of demand for State support of individuals and condominiums Q4 2016 145 830

2 402,3

145 753

2 396,3

145 696

Q3 2016

2 382,9

145 666 132 191 111 011

Q2 2016

93 489 80 997

48 113 34 756 23 132

1 514,6

1 287,2

79 545

Q4 2015

1 805,0

1 287,3

80 120

68 845

2 155,0

1 302,6

80 122

Q1 2016

2 379,7

1 274,7 1 113,2

810,9

583,1

392,5

14 474 251,3

Q3 2015

7 405 131,0 3 984 71,3

Q2 2015

2 838 50,2 2 339 41,4 2 007 35,0

Q1 2015

1688 29,4 1604 28,0 737 12,4

Q4 2014 року

number of loans granted, pcs amount of loans granted, UAH mil according to the data as of 10 October 2016, provided by the SAEE

140 2,3

5

Loans by the purpose of funding, pcs

according to the data as of 27 October 2016, provided by the SAEE

Equipment

Boilers

In general, during the period of its implementation, the programme has contributed to partial energy efficient modernization of buildings for more than 185,000 households.

Where do the things stand today?

At the beginning of July 2016, the approved budget of the programme for individuals exhausted as the public demand exceeded the allocated funding (in 2016, the total of UAH 893.8 million was allocated from the State Budget, including the funding for condominiums and housing associations). The work in the most popular direction resumed only on October 6, when around UAH 90 million were reallocated from the budget for condominiums.

Almost all additional funds were used in less than 3 weeks after lending to individuals resumed.

According to the SAEE experts, 6

Condominiums (comprehensive measures)

the potential of energy efficiency lending market in 2017 will be UAH 5.6 billion at the least. In order to meet the demand, the “warm� loan programme needs UAH 1.96 billion. In total three corresponding budget requests were submitted for approval to the Ministry of Finance of Ukraine by the SAEE and the Ministry of Regional Development, Construction and Housing and Utility Services of Ukraine (Ministry of Regional Development). This proposal gained no support. So far, no funding for the programme has been envisaged in the 2017 State Budget.

In mid-October, the SAEE interactive database of local programmes compensating for a part of energy efficiency loan interest contained information about 199 programmes, where

Amount of loan funding by the purpose of funding according to the data as of 27 October 2016, provided by the SAEE

Equipment

Boilers

93 were approved with funding, 100 were approved without funding and 6 are in the pipeline.

In the likely case of freezing of the Government’s “warm” loan programme in 2017, there is a risk that all these local and regional co-funding programmes for households will not be continued as well.

To sum up, the “warm” loan programme is, in fact, the only efficient mechanism of State aid in the field of implementation of energy efficiency measures by households. Given the aforementioned disadvantages, it is far from being perfect. Still, a tremendous growth in the popularity of the programme shows that even basic opportunity to streamline energy consumption is in great demand. It was due in

Condominiums (comprehensive measures)

no small part to consistency — the programme has been implemented with minimum changes for two years of the active period.

Therefore, it does not seem reasonable for the Government and Verkhovna Rada to leave the programme without budget funding when it has gained the greatest momentum. Not only new and experienced applicants who risk to be left without partial compensation will be affected.

Inconsistent state policy and inappropriate informing of other programmes may erode public trust in future programmes, including the planned activities of the Energy Efficiency Fund.

Considering possible sources of the Program’s financing, one cannot fail to notice an obvious imbalance between the State social 7

policy and the energy efficiency policy. Currently, the Draft Law “On the 2017 State Budget of Ukraine” envisages around UAH 51 million for housing subsidies and benefits as compared to only UAH 0.8 million for establishing the Energy Efficiency Fund and cutting off funding for the “warm” loan programme in effect.

In addition to creation of new jobs and revival of the construction and services sectors, allocation of at least a part of funds meant to cover social needs for energy efficient modernization of residential buildings would allow for gradual digressing from such thoughtless “burning” of money spent on inefficient use of expensive imported energy resources.

ENERGY EFFICIENCY FUND: PURPOSE AND FUTURE WORK The establishment of the Energy Efficiency Fund will become a pivotal moment in the Government’s attempts to offer a comprehensive instrument of support for those who are eager to invest in energy efficient modernization of their houses, taking account of the expected scope of this project. The idea to establish such Fund is not new — this instrument of state energy efficiency support in the housing sector has been used in the EU for a long time and proved to be efficient. The obligation to establish such funds is explicitly set out in Directive 2012/27/EU. In a number of Eastern European countries, such instrument of support was successfully used for modernization of the post-Soviet housing stock.

8

It took more than two years and a half to pass from expressing the first ideas related to the development of the Fund’s concept to the presentation of the Energy Efficiency Fund’s Concept by the Ministry of Regional Development to the National Reform Council.

Finalizing the Fund concept is still underway. However, at this stage, it is possible to form the first opinions on the structure of the future Fund to be officially launched in April 2017.

Why is it important to use a comprehensive approach? Ukrainian heat and hot water consumption sector is very inefficient. Heat consumption per 1 sq. m of living area is twice as high as the current level of consumption in the EU. Gas losses at the stage of heat

consumption by residential buildings are estimated at 9.0 billion cub. m per year; gas losses in the district heating system reach 2.4 billion cub. m per year. Therefore, the total potential reduction in gas consumption is 11.4 cub. m per year, which is 70 percent of the natural gas volume imported into Ukraine in 2015.

The highest reduction potential

can be attributed to the activities aimed at thermal rehabilitation of buildings (around 7.3 cub. m) and replacement of individual boilers (1.7 billion cub. m). Activities aimed at modernization of municipal CHPPs can save another 2.4 billion cub. m (modernization of boiler houses can save 1.1 billion cub. m; rehabilitation of heating networks can save 1.3 billion cub. m).

Natural gas saving potential, billion cub. m

according to the estimates of the Ukrainian Centre for European Policy, 2016

Thermal rehabilitation of buildings

CHPP modernization

2.4

Replacement of individual boilers

FOR

SON

CO

RI MPA

Total volume of natural gas imported into Ukraine, 2015

1.7 7.3

11.4 billion cub. m

16.4 billion cub. m

9

Therefore, in terms of priority, most efforts should be directed towards thermal modernization of residential buildings.

What is the concept model of the Fund? The Fund will be financed through contributions of international donors (in particular, the Government of Germany and the EU have already acknowledged their commitments to do so) and through the State Budget funds.

However, donations from the international community require compliance with strict corporate governance and transparency standards to prevent potential misuse of borrowed funds.

Finally, upon donors’ demand, a separate law on Energy Efficiency Fund should be passed to ensure sustainable funding and the greatest possible level of transparency. Currently, there is no final decision on the Fund’s management structure, but it is known to include three tiers — the Supervisory Board, the Board of Directors and Executive Offices. The Supervisory Board will consist of three independent representatives selected based on professional requirements only, three representatives of the Cabinet of Ministers of Ukraine and one representative of international financial institutions.

The Supervisory Board will be in charge of development of the Fund’s strategy and control over its 10

activities. The Board of Directors will deal with day-to-day issues. The Technical Director and the Financial Director will organize the activities of the technical and financial offices to be responsible for the marketing of the Fund’s products.

The Fund’s financial products may include grants, soft loans and professional technical support for both private households and co-owners of multi-apartment buildings. The information on exact parameters of financial products (amount of grants, soft loan interest rate etc.) is currently unavailable. However, during the presentation of the Draft Law “On the Energy Efficiency Fund”, it was announced that the maximum loan compensation for a multi-apartment building may amount to 50 percent, provided that energy efficiency class A is achieved according to the EU standards. The Fund’s products will be distributed through banks and Centres for Administrative Services.

The expected outcome of the Fund’s activity will have an effect on the following areas: 1. Reduction in gas consumption and heating bills 2. Saving on subsidies, and 3. New jobs and increased tax receipts.

According to the preliminary estimates published in summer 2016, the following targets will have

been achieved in five years of the Fund’s work: • Gas saving – 1.5 billion cub. m per year (reduction in annual gas imports by UAH 9.1 billion); • Reduction in budget expenditures on subsidies – UAH 5.0 billion annually; • Creation of a new energy efficiency services market – with a market capacity of up to UAH 60 billion; • Creation of new jobs – 75,000; and • Increased tax receipts (VAT, payroll tax and income tax) – over UAH 10 billion per year.

In addition, the Energy Efficiency Fund’s activities will have a positive effect on attraction of foreign investments to Ukraine.

According to the preliminary estimates of the Ministry of Regional Development, during the first five years of its activity, the Fund will be able to attract UAH 16.5 billion, where UAH 5 billion will be granted by donors. In particular, during the initial years, the funding will be provided according to the following scheme: • funding from the State Budget in the amount of UAH 1.3 billion in 2017 and of up to 3.7 billion in 2018; • funding by donors in the amount of UAH 0.75 billion in 2017 and of

UAH 0.93 billion in 2018.

The Fund may also attract credit resources of international financial institutions starting from 2019 (probably, against state guarantees).

However, both financial parameters of the products and the amount of funding are being negotiated by the Ukrainian Government and donors and may change significantly.

What legal framework is necessary for the Fund? In order to ensure efficient implementation of the Fund’s co-financing mechanism, it is necessary to establish a relevant legal framework, including a reform of management of multiapartment buildings, introduction of commercial metering of utility services, implementation of the systems of energy audit and certification of buildings.

In addition, the current system of utility subsidies for households is the major barrier to the Fund’s activities as the funds saved on subsidies by the State due to the implementation of first thermal insulation projects should become the main source of funding for the Fund’s subsequent projects (so called “revolving” mechanism).

However, for this purpose, it is necessary to engage the maximum possible number of subsidy beneficiaries in thermal modernization projects (according to the estimates of the Ministry of Social Policy of Ukraine, their

11

number may exceed 50 percent of households during this heating season) who are not interested in reduction of their consumption under the current subsidy system.

In order to create appropriate incentives for such category of residents of multi-apartment buildings, it is necessary to

12

monetize subsidies, i.e. to provide subsidy beneficiaries participating in the Fund’s programmes with the guarantee that they will be able to receive the residual subsidy amount onto special accounts and invest the money in the energy efficiency projects or pay for housing and utility services.

QUOTE

Following the Government’s decision to finance the to-be created Energy Efficiency Fund and to cease financing of the “warm” loans program, do you agree with the approach of preferring strategically important but not yet operational vehicle over not so sophisticated but ongoing measures?

Both programs (measures) are important. I think that Energy Efficiency Fund has to provide assistance for bigger projects and “warm” loans program for smaller ones. Additionally, I think that combination of both instruments will be usefull and possible.

What conditions should be met by Ukraine and by the anticipated Energy Efficiency Fund in order to attract on a stable basis foreign investments and/or donor financing?

The biggest problem for the Energy Efficiency Fund and “warm” loans program is a prepared client - ondominium or subjects of public sectors. The Fund has to operate under transparent rules and credible managment. But the most important issue is the transparent rules for supporting of projects.

Karel Hirman

Energy Sector Specialist, Strategic Advisory Group for Support of Ukrainian Reforms 13

NOTES

14

NOTES

15