"In the road to energy efficiency, finding the gas pedal" Vivica Wlliams for magazine "Zhytlovo-komunalne gospodarstvo Ukrainy"

Vivica Williams is a 2011-2012 US Fulbright Fellow in the field of energy. She is affiliated with the International Centre for Policy Studies.

Ukraine can use its obligations to the European Energy Community to expedite national energy efficiency reforms and alleviate economic woes

For Ukraine, improving energy efficiency (EE) could be the best remedy for a host of problems. Using less energy will help ease the fiscal deficit by lowering the amount needed – by as much as 30%– and therefore the cost of imported natural gas. And industries will reduce their operational costs and become more competitive and resilient in a downturn market. In general, EE stimulates sustainable economic growth and leads to job creation.

As it is, Ukraine is one of the most energy-intensive economies in the industrialized world. In 2010, the Government made the ambitious goal to reduce energy intensity by 20% by 2015 and 50% by 2030. To meet these energy savings goals, there must be compelling impetus for change. If prevailing internal needs are not enough, the European Energy Community (EEC) and its obligations could be the additional key to establishing conditions for successful EE reform in Ukraine. EE directives in the Energy Community Treaty (ECT) provide Ukraine with proven techniques, clear guidelines and the accompanying EU support it needs to implement EE reforms.

Energy Community obligations

The EEC is composed of the EU and 9 contracting parties[1] obligated to fulfill certain EU directives which, when implemented, will theoretically create a shared energy market, one that is both competitive and socially responsible. Ukraine signed the ECT in September 2010 and became a contracting party in February 2011. The ECT contains binding agreements on the regulation of natural gas, electricity, competition and environmental protection related to energy concerns. Energy efficiency is another key aspect of the ECT; and, for Ukraine, it could provide the greatest positive cost-to-benefits if effectively implemented.

The energy efficiency acquis in the ECT are concentrated in primarily three directives and address issues that are especially relevant to Ukraine. The Energy End-Use Efficiency and Energy Services Directive (2006/32/EC) pertains to how well energy is used by final consumers in industry, services, agriculture, households, transportation, and other areas. This directive would particularly affect Ukraine’s district heating stations which lose up to 70% of overall energy produced. The Energy Performance of Buildings (2010/31/EU) and Labeling of Energy-Related Products (2010/30/EU) directives strive to create comparative minimum standards for the efficiency of new and existing buildings and appliances as well as to ensure regular inspections and certifications.

The implementation of these EE directives is hindered by the same types of obstacles delaying other reforms. Laws are fragmented, and the regulatory framework is poorly structured, preventing the adoption on a national level of what works in municipalities and regions. The national and local governments as well as financial institutions often do not have the required technical capacity to initiate and sustain EE projects. And funding is limited or nonexistent due to few incentives to invest, excessive tax burdens and unattractive loan terms. Despite their significance, these obstacles can be surmounted with careful planning, deliberate execution, and cooperation on the international, national, and regional levels.

Aligning legal and regulatory frameworks

To meet EEC requirements, one of the first steps is harmonizing Ukrainian legislation and regulations with ECT directives on energy efficiency. The current Energy Strategy to 2030 included a goal for decreasing energy intensity by 50%, but did not outline specific reforms or a national path for achieving this ambitious target. The international community, however, seized upon energy use reduction goals to help the Ukrainian government foment more substantial plans.

With funding from the EU, the State Agency for Energy Saving and Energy Efficiency (SAEEEC) is already addressing institutional reform and developing a policy agenda. Yet existing legislation and regulations make it difficult for any activity to yield sustainable results. The EU will begin cooperating with Ukraine on a twinning project, “Improvement of the Policy Framework in the Sphere of Energy Efficiency and its Approximation to the Requirements of the EU Legislation”, slated to begin in March 2012. The project will improve or introduce mechanisms needed to implement legislative changes, including developing incentive schemes, energy management practices and public information campaigns.

The Energy Services Directive presses contracting parties to develop a National Energy Efficiency Action Plan (NEEAP), a comprehensive roadmap for implementing EE governance, which can replace Ukraine’s mostly declarative 1994 Law on Energy. The current Law provides definitions and acknowledges existing problems, but it goes no further. A NEEAP would establish specific national energy savings targets, outline compulsory activities (e.g. energy audits), and present a detailed methodology for obtaining these goals. It will also provide a higher degree of transparency as it includes the clear identification of financial resources. This action plan cannot be formulated in isolation but rather requires engagement with stakeholders. Energy efficiency policy must also be firmly situated in every aspect of policy strategy. SAEEC cannot accurately track improvements or satisfy EU conditions for budget support without such a plan.

By more closely aligning current planning tools with the Energy End-Use Efficiency Directive, the government can encourage consumers to decrease their energy use and define the non-budgetary incentives that will help accomplish this goal. The current State Target Economic Programme of Energy Efficiency for 2010 – 2015 establishes conditions for reducing the level of energy consumption but places little emphasis on end-user energy demand. Since its creation, state policy has shown to be ineffective in lowering energy intensity, an indication that the policy implementation tools require revision.

Finding the funds

Meeting EE directives will require significant upfront investment but expenses are spread across multiple sectors and are often secondary to meeting other ECT requirements. In the case of power plants, many upgrades installed to meet ECT environmental directives have the added bonus of also increasing energy efficiency. According to the International Finance Corporation, the housing sector, however, will require a projected $16 billion USD over 10-15 years to integrate EE technologies and practices. The World Bank estimates that, in order to meet the 2030 goal of 50% energy savings, Ukraine will need to invest at least USD 1 billion annually after the initial upgrades. This sum should not be a deterrent to reform. EE projects are quite attractive to investors, making financing less of a hurdle than legal and regulatory reform.

EE investments generally enjoy short payback periods as they are normally economically viable. In May, the World Bank approved a $200 million USD loan to be utilized by UkrEximBank, which in turn will directly finance eligible EE projects and provide sub-loans to other banks. This loan program will serve primarily the industrial and municipal sector. Until recently, loans were unavailable or had unattractive terms, and banks were uninterested in EE projects. World Bank and other loan programs should help address this issue. Industries, however, remain skeptical about the effectiveness of EE programs. For this reason, projects must deliver real energy savings quickly (within 1 – 3 years) to build program credibility.

In this case, it is the creditworthiness of many prospective borrowers – municipalities and businesses – that may impede financial sustainability. Private financers are unable to assist many companies requesting funds because of credit issues. The Nordic Environmental Finance Corporation (NEFCO) reports that it cannot fund 80% of applicants due to excessive tax burdens. The current taxation legislation increased the tax burdens for small- and medium-sized enterprises, forcing many to close. With these closures, municipalities saw their budgets shrink as a result of the decrease in tax payments. Tax system reforms have been slow to reduce pressure on these businesses.

In contrast, bilateral and multilateral donors are increasingly assisting local authorities to enact EE practices. A formal policy could coordinate government and donor activities, but to-date one does not exist. Nevertheless, donor support is vital when first establishing a national EE program. In addition to money, international financers usually offer assistance building technical capacity, improving legal frameworks and formulating awareness campaigns. EE must become sustainable, however, after donor-funded projects end and this is often not the case. To keep successful pilot projects from becoming isolated events, the government will need to rely on other funding mechanisms.

Besides traditional subsidies, energy taxes or budget allocations, the International Energy Agency reports that system public benefit charges (SPBCs) in particular provide a more workable balance of stable and adequate financing. These programs could work well on the regional and local levels, especially after electricity concerns are privatized. Energy providers collect revenues from customers that are then earmarked by independent regulators for EE-related projects, including assisting vulnerable populations in managing energy use. Public benefit charges usually only approach between 1 – 3% of an energy provider’s revenue, but generate substantial funds for reinvestment.

According to the Energy Services Directive, the public sector should also fulfill an “exemplary role” in EE improvement measures. But what constitutes “the public sector”? Only 39 percent of EU member states have precisely defined public sectors. Yet this sector is where it is easiest to implement broad EE public policy with the largest spill-over effect into the private sector. An absolute definition may not be required, but the Ukrainian government can identify key concerns (schools, public administration building, etc.) and aggressively promote whatever EE improvements it makes.

Engaging and empowering

The Government is realizing the necessity for decentralizing EE reform. At the April 2011 Conference ‘Energy Efficiency: Best Practices from European and Ukrainian Cities’ in Kyiv, SAEEC Chairman Mykola Pashkevych said the government is moving away from controlling the implementation of EE programs and turning instead more to advocacy and promotion. Local authorities can now assume more control over energy management within their municipalities. It is essential, however, to build the capacity of local authorities to act independently while at the same time providing clear legal and regulatory support and incentives from the national government. Moreover, other stakeholders require the same consideration and support.

The ECT sets the institutional framework that makes being an EE provider of energy a distinct advantage. Energy providers often concentrate on the barriers to energy efficiency, i.e. cost and temporary decrease in revenue during implementation, instead of focusing on medium- and long-term outcomes. After implementing ECT directives, DTEK and other providers would be able to compete with companies in an EU internal electricity market where environmentally friendly and efficient energy are in high demand. This potential, however, will not motivate most companies to implement potentially costly EE programs. These companies may respond best to a combination of uniformly-instituted incentives, obligations and strong oversight by regulators. SPBCs can also serve to finance EE technologies and practices.

The private sector and the public must also become active stakeholders. Both drive demand for EE products as well as, in the case of the private sector, develop new and lower-cost EE technologies. Success depends entirely on their understanding of and motivation for implementing energy savings programs. Public information campaigns can stimulate private sector interest and awaken public demand for such programs. A formalized countrywide communication campaign would play a major role in propagating more success stories.

Local authorities can also collaborate under a national umbrella to share experiences and best practices. Currently this role is filled by a handful of associations and international organizations acting locally. The Association “Energy Efficiency Cities of Ukraine”, for example, coordinates with other associations to connect local authorities who implement EU energy efficiency acquis and other energy savings techniques.

While donor aid often focuses on industrial and municipal sectors, individuals and small- and medium-sized enterprises can also benefit from low-interest micro-loans for EE projects. Again, the short payback period of this type of investment can be very appealing to the public and, if properly administered, also profitable for local banks. Such targeted loaning programs have been successful internationally, as in Turkey and the Czech Republic. Pilot programs initiated in Ukraine, such as UKEEP and the low-interest loan program in Lviv, indicate the great potential and public demand for such endeavors.

Small-scale financing, big time potential

Significant investment is required to meet the energy efficiency directives in the Energy Community Treaty, but not all of it needs to come from government budget allocations, large-scale investors or other traditional sources. Energy efficiency relies heavily on the involvement of and investments from the public and small- and medium-sized enterprises.

The Ukraine Energy Efficiency Programme (UKEEP)

Funded by the European Bank for Reconstruction and Development (EBRD), this project provides technical assistance and debt financing for EE or renewable energy projects. UKEEP focuses on private businesses, including agribusiness and municipal services with majority shares privately owned.

http://www.ukeep.org/

Energy Saving Programme for Residents of the Lviv Region for the years 2009-2012

This program subsidizes 15% of the interest on loans for private citizens to install energy efficient technologies. This energy savings project was initiated by Bank Lviv and NEFCO.

http://www.loda.gov.ua/ua/priorities/energysaving/Programs/

Donor or finance organizations fund these projects for only a specified period of time. Although they have both been extremely successful, the programs have not been reproduced in other regions or extended nationally.

Beyond Energy Community obligations

Besides fulfilling EEC requirements, there are secondary drivers and additional benefits to enacting the ECT EE directives. Firstly, Ukraine is still in the final negotiating stages of an Association Agreement and a Free Trade Agreement with the EU. Yet it has already acceded to the Energy Community – its first truly binding membership in an EU organization with obligations no different than those imposed upon EU member states. Success here casts a hopefully light over other agreements, raising the international community’s opinion on Ukraine’s prospects as a reliable partner country.

Secondly, Euro 2012 affords Ukraine opportunities to create energy efficient infrastructures. These structures will far outlast the brief sporting event for which they were built and serve as showcases to attract additional investment and stimulate job growth.

Energy efficiency is the most cost effective way to reduce energy intensity and, according to the International Energy Agency (IEA), Ukraine’s best opportunity for improving energy security. The government recognizes the truth in this statement. Recent news reports and government statements indicate support for replacing inefficient lighting and district heating boilers, renovating schools and military housing, and generally reducing energy use. The real work has yet to begin, but the foundation was laid decades ago and made much stronger when Ukraine signed the Energy Community Treaty, a binding contract that provides the incentives, roadmaps and guidance that can accelerate reform.

[1] Albania, Bosnia & Herzegovina, Croatia, former Yugoslav Republic of Macedonia, Montenegro, Serbia, the United Nations Interim Administration Mission in Kosovo, Moldova, and Ukraine.