Background on E5P
The Eastern Europe Energy Efficiency and Environment Partnership (E5P) is a newly establish multi-donor fund modelled on Northern Dimension Environment Partnership (NDEP). In 2009 Sweden during its Presidency of the European Union proposed an EU initiative for municipal energy efficiency in Ukraine (as focal region) with further expansion to other Eastern Partnership countries (Armenia, Azerbaijan, Belarus, Georgia and Moldova). A study for the possible expansion was launch during 2012.
The key objectives of the Fund are
- Improvement of energy efficiency,
- Significant reduction of CO2 and
- Other Green House Gas emissions,
- Enhanced economic competitiveness and affordability of assets maintenance.
The Partnership is implemented through a Fund denominated in Euro. The purpose of the Fund is midterm delivery of coordinated and effective international financial support by combining grant contributions from a group of donors and beneficiaries to be used for achievement of the energy efficiency objective.
The initiative will take a flexible approach of grant allocation criteria, whilst avoiding market distortions. Grants will be used for either technical assistance or investment grants. Technical Assistance funding can also be allocated for policy dialogue on energy efficiency related strategies.
EBRD, EIB, NIB, NEFCO, CEB, The World Bankand any other International Financial Institution (IFI) may act as Implementing Agencies (IA) for the Fund.
The IAs will develop projects with E5P grants intended to complement loan funding and make investments financially viable. The individual project is normally implemented in parallel with an Institutional Development Programme including tariff reforms, operational utility management, preventive management and training.
EBRD has been entrusted with the role to act as the Fund Manager of E5P on the same basis as for NDEP.
Rationale for E5P
Energy intensity in Ukraine is in accordance with official figures around three times higher than in the EU. This means that on average, Ukrainian companies use three times as much energy to produce the same output as companies in the European Union, the situation in the municipal sector is even worse.
Needless to say, the potential for energy efficiency in Ukrainian utilities is huge, even with today’s Ukrainian energy prices. However, the market for energy efficiency investments in Ukraine is still in its infancy. But with increasing energy prices and WTO accession, the future for the households may be extremely painful if the utilities and municipalities will not take every possible step to lowering their energy consumption by using every opportunity for profitable energy efficiency investments. There is a certain scope for energy efficiency investments and improvement across all sectors in Ukraine, not least the municipal utility sector.
In the utility sector the investments means
- Climate change mitigation,
- Enhance economic competiveness for the utility, municipality and the State by easing the burden of subsidies
- Demand side measures intended to change the user consumption behaviour
- Improved affordability and willingness to pay for the services
- In total positive financial, economical and environmental effects
Benefits of Energy Efficiency Investments
The foremost argument for energy efficiency investments lies in decreased costs for electricity, natural gas, mazut and other fuels – a direct effect which can be seen immediately on the utilities income statement. Since the existing equipment in many district heating and water and wastewater utilities have deteriorated at the same time as the equipment is overdesigned, the potential for energy saving are huge. Investments in Energy Efficiency increase the level of service as well as give an opportunity for tariffs in balance and cost recovery. The improvement of energy efficiency often automatically improves the output and increases revenues. Emissions trading can also increase revenues where a significant amount of energy is saved, indicating that there might be opportunities for additional financing via the Kyoto mechanism. The utility risk is reduced through lower exposure to energy prices, which in turn may increase the value of the company for future potential privatisation. Decreased energy usage leads to lower emissions, improving the environment and the image. Numerous other positive effects can also arise from energy efficiency investments. A substantial part of the municipal budget but also the State budget is related to subsidies in the utility sector. The subsidies normally cover purchase of fuel and other services for the utilities as well as tariffs for a broad range of different vulnerable consumer groups. By investing in energy efficiency and energy savings, the State and municipalities will find possibilities to reach a more balanced budget free from subsidies.
The Economics of Energy Efficiency Investments
The financial payback period for energy efficiency investments varies widely depending on the type of project, but typically lies between 1.5 and 6 years, which is a short time compared to traditional capital infrastructure investments, see below structure and benefits.
Naturally, higher energy prices and higher energy savings per invested dollar lead to a shorter payback-period. Generally, the internal rate of return on energy efficiency investments is higher than the interest rate on the debt financing required for the investments. This means that any additional debt that a company takes has a limited impact on the company’s balance sheet, and the ultimate financial effects of the investments are positive. Utilities will see their energy costs decreasing radically with very short payback periods on the investments made.