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Second Learning Event, 10th of February 2022. Summary of presentations

How to accelerate energy efficiency investments - Development of ESCO Market and EnPC

EU update on innovative financing schemes at regional or national level

Mr. Martins Zemitis, European Commission Representation, Latvia

Key messages and learning

Mr. Martins Zemitis started his update describing the need to set up innovative financing schemes at regional or national level to create the conditions for adequate supply of private finance for energy efficiency investments. The EU “fit for 55” package is one of the mechanisms to deliver transformational change needed in a fair, cost-efficient and competitive way to meet climate changing goals by 2050.

The policy framework describes Energy performance contracting (EnPC) as mechanism for increasing the uptake of energy efficiency projects. A major advantage of this mechanism is its capacity to mobilize the private sector to provide finance, performance guarantees and share risks. EnPC are also suitable and relevant for the renovation of public lighting. Increased potential could develop in the use of EnPC for renovating district heating systems, the adoption of renewables, and for the smartification of infrastructures. Moreover, this commitment is the key because the public sector plays an exemplary role in the development of building renovation and energy efficiency markets and in the adoption of sustainable support mechanisms for the private sector to improve the energy performance in this sector.

Financing framework addresses the wide range of the EU funding programs to support energy efficiency: 1) to directly co-finance investments (Recovery and Resilient Facility, Cohesion Policy Funds (ERDF, ESF) and Just Transition Fund and Modernization Fund); 2) to mobilize and leverage investments (Financial instruments and technical assistance under InvestEU EIB including the ELENA Facility); 3) to support technology development, research & innovation (Horizon Europe and Innovation Fund); 4) to address market barriers and provide capacity building (LIFE and specifically: the Clean Energy Transition sub-program).

Stronger provisions on the removal of obstacles and barriers to renovation, and on the mobilisation of financial incentives with one-stop-shops accessible to all building ecosystem’s stakeholders, so that all barriers to building renovation are addressed and Member States promote appropriate training. Higher financial incentives and technical support measures are directed to deep renovation projects and those targeting a sizeable number of buildings and leading to considerable overall energy savings. Although the concept of ‘deep renovation’ has not yet been defined in the legislation, it should be defined as a renovation that transforms buildings into zero-emission buildings. First step to this goal is the renovation that transforms buildings into nearly zero-energy buildings. This definition serves the purpose of increasing the energy performance of buildings.

What’s the learning and follow-up prospects

  • Political commitment and designating EnPC to coordinate and push the process
  • Need for a financing mechanism allowing forfaiting/refinancing of EnPC
  • Combination of EnPC with EU grants for comprehensive renovation while remaining off-balance

Presentation

Private EnPC involvement in financing energy efficiency - Latvian policymakers outlook

Mr. Raimonds Svanks, Latvian Environmental Investment Fund

Key messages and learning

Mr. Raimonds Svanks pointed out that in Latvia RoundBaltic acts as organizer, coordinator and facilitator of productive interaction between the EE practitioners and policymakers in order to minimize the obstacles and find alternative financial sources to create new financial instruments. This can be best achieved by gathering stakeholders in a dynamic forum and stimulating their constant and continuous further cooperation. One of the main problem is that available EU and public funds alone will not be sufficient to cover the investments necessary to reach the energy and climate objectives in 2030 and 2050. One of the possible solutions is to present a framework for attraction of private financing. EnPC is a form of financing for capital improvement which allows funding energy upgrades from cost reductions. At the same time Member States should continue supporting the public sector in the uptake of energy performance contracting by providing model contracts that take into account the available European or international standards.

On the European level the campaign has been launched to promote and build capacity for EnPC and ESCO. The aim of the campaign is to enable country-specific discussion and capacity building of the core stakeholders, which should enable better understanding of the business model, its challenges and opportunities, increase confidence regarding its reliability and effectiveness, and help Member States in establishing a legal and financial framework for the market with energy services

Latvia needs to be more active in supporting the ESCO system and overcome the problem that the public sector has no experience in preparing and implementing ESCO procurement and no guidelines are available for preparing ESCO projects and organizing procurement. Given the lack of experience in the public sector in the preparation and implementation of ESCO procurement, it is necessary to develop guidelines for the preparation of public sector ESCO projects and the organization of procurement as well as to ensure that local governments and public authorities can make long-term commitments (up to 20 years) if an ESCO project is implemented.

What’s the learning and follow-up prospects

  • EnPC requires some challenges in approval process for every single ESCO contract to be undertaken by public sector
  • It is important to master EU grant money and consider ESCO services only after this option has been used up
  • Current Latvia’s energy efficiency target (improve energy efficiency in 3% buildings per year) is met
  • Current human capacity and skill level to undertake the implementation and control of active ESCO market can be changed by highest level political decision on what is important for economy and fiscal space of Latvia in the next 10-year period

Presentation

EnPC in public buildings - The Lithuanian experience

Mr. Rolandas Marcinkevicius, ViPa, Lithuania

Key messages and learning

Mr. Rolandas Marcinkevicius said that the main problem on EnPC in public buildings is that public institutions are reluctant to borrow grants, because there are challenges to achieve real savings (economic viability) on the one hand and high cost of deep renovation on the other hand. Another aspect is the need for additional subsidies in modernization projects, especially in cultural heritage buildings. Sometimes there is lack energy data available about public buildings, as well as poor maintenance.

Some measures have been already made to make this process more appealing. Facilitation and promotion of financial instruments includes appointing of centralized public real estate manager, improving building ownerships related obligation system and discussion and promotion of ESCO model at the state level. Standardizations and simplification of a process using ELENA support is also a key element in achieving positive results on EnPC in public buildings.

Analyzing EnPC situation status in Lithuania it is important to increase documentation quality to avoid implementation delays and decrease costs and also the need for further improvement of EnPC procedures and documentation. Additional aspects that can be done are to increase expertise in municipalities to be able to prepare complex projects and lower grant element increases chance of EnPC interest. Demonstrating added value over regular procurement can also help to involve ESCOs’ at earlier stages. The importance to see the big picture can involve early consultation with stakeholders, consistent and transparent political support, facilitation and promotion as well as simplification and standardization of financial instruments. All that must result in good planning and offering clear milestones and steps to achieve them.

What’s the learning and follow-up prospects

  • Integrated planning and monitoring
  • Availability of financing
  • Effective and timely communication
  • Application of one-stop-shop approach

Presentation

Renovation with EnPC Plus savings guarantee

Mr. Wojciech Stańczyk, The Polish National Energy Conservation Agency (KAPE S.A.)

Key messages and learning

Mr. Wojciech Stańczyk started by stressing out the initial idea to create financial instrument that will support the deep renovation of the buildings through the use of EnPC contract. The idea is to establish long term fund that will purchase the receivables from ESCOs and allow them to engage in new projects without freezing their assets. There is a need for additional element to be integrated in this scope – the need to be more competitive to current available models for financing the renovation processes. As for beneficiaries – the program was offered to local authorities, housing cooperatives, housing associations and companies owned by local authorities.

Creation of standardized EnPC contract that is used within the project helps to lower costs. The program as such is split in two phases (currently it is pilot phase), but it is already turning into main phase with available budget ten time more than in pilot phase. Current focus is on multifamily buildings but as the program evolves focus will also include not only multifamily buildings but there is interest in public buildings. Offered subsidy is in range from 10% to 30% depending on the scope of the renovation and savings achieved. Some additional elements of the program include minimal value of the investment; inclusion of the energy management system as mandatory; up to 20% of the investment value can cover non-Energy measures and all buildings need to reach a dedicated standard of efficiency.

The application process consists of pre-application to clarify to which standard to apply for, later after simplified calculator of the investment are made and there is a guarantee of subsidy the important part of choosing the ESCO can come into place. That includes audit by ESCO and evaluation of optimal scope and costs. Later one year after implementation there is a monitoring to be sure that the project meets all the standards. Despite the transparent and clear application process the main barriers ad challenges are the increasing costs of energy; ambition of building owners and available funding programs; lack of understanding of the EnPC concept and complexity of the contract; technical condition of the building and poor quality of energy audits.

Presentation

Clarification, guidance, and recommendations on EPC involvement in achieving energy efficiency in public sector.

Mr. Robert Pernetta, European Investment Bank

Key messages and learning

Mr. Robert Pernetta pointed out to some barriers and challenges in the government sector. Latvia’s policymakers participating in roundtable discussions have clearly indicated their resistance to developing playing field for ESCO services by characterizing ESCO model as complex and burdensome. That is why EIB with the support from EU Commission programs have provided advisory services in Latvia by consulting ESCOs, Altum and other institutions. Additionally there was a renovation strategy presented that maps the possibilities of EnPC, EnPC+grant, EnPC+ own resources or Energy Efficiency-PPP. In general the report was well received but there were some administrative difficulties that didn’t allow it to take forward and implement fully at some point.

There are misconceptions that providing easy pathway to borrowing for ESCOs is a threat to Latvia’s fiscal space as well as opening the gates for ESCOs might cause inflation of construction costs, which needs to be avoided. It should be stated that if all the guidance and recommendations are followed there is no risk for the fiscal space. Also off-balance sheet EnPC has an inbuilt protection against inflation. When the price for labor and material rises faster than the energy price the scope of off-balance sheet EnPC is reduced.

Current government does not have a human capacity and skill level to undertake the implementation and control of active ESCO market. It can be changed by highest level political decision on what is important for economy and fiscal space of Latvia in the next 10-year period. Evaluating current situation it is not necessary for municipalities to build up the capacity for EnPC procurement. It is useful to build up facilitation services in the private sector that help municipalities in project scoping, design and during the procurement process. There are some successful examples from other EU countries to follow. To use private facilitators is also good because then the knowledge can be transferred from project to project, which is not the case if each municipality act independently.

Presentation

Final part: Discussions, summing-up the results and pointing out next steps

Key messages and learning

To finalize the discussion and to sum up the learning event there are some main points to be emphasized:

  • There is an insufficient role of EnPCs and ESCOs so far but it should be kept in mind that the market in every country is different and consisting of various factors and problems to be solved. That is why it is hard to present and adopt one universal solution that fits every situation
  • One of the common issues still to be stressed out is the role of bundling of EnPC projects. It is necessary to find some formal ways to make it work in the case when there are bigger projects and also smaller projects. The last ones though might not be of interest for big ESCO companies. The question is how countries can create market place when contracting will be available for small/medium/big ESCOs, so that everybody can find the projects they can handle
  • It is advised by many experts to avoid the situation when there are only big ESCOs in the market because it can cause the situation when it can be limitation to the competition and thus it might not meet the goals for implementation of as much energy efficient projects as possible. Small companies simply might not have the accounts ready for big scale operations
  • From the point of view of public institutions it is hard to say what is the best institution to address but the understanding from the government side is important that public institutions in practice are no different from private enterprises when it comes to the need to achieve some energy efficiency levels. There are certain requirements to be met and achieved that our governments and the European Commission has set to the member states. There are still many things to continue working on simultaneously on different channels