Western Balkans Governance of Energy Efficiency by Dr Lorenc Gordani

Energy Efficiency is often described as the EU’s biggest energy resource, the “first fuel”, as it is competitive, cost effective and widely available. Energy efficiency will also enhance energy security, while at the same time decreasing emissions. This is why the EU has ambitious energy savings targets for 2020 and 2030, and ‘energy efficiency first’ is one of the principles of the Energy Union project.

The energy intensity of the Western Balkan countries is very high compared to the average of the EU. Similar to other transition economies, Albania, Bosnia and Herzegovina, Kosovo, the former Yugoslav Republic of Macedonia, Montenegro, and Serbia, emerged from the socialist era with energy intensive economies. Significant progress was made over the past 15 years and energy intensity, defined as the energy consumed to produce a unit of GDP, declined by approximately 20% – 25%. However, the WB6 remain 3 times more energy intensive than the EU28 at large and 1.6 times more than new member states from Central and Eastern Europe.

These countries therefore have an efficiency potential unrivalled in Europe. The residential and transport sectors represent the largest components of Total Final Energy Consumption, accounting for 50 to 70% of the total. Industry is also a significant consumer in Serbia, Montenegro and the former Yugoslav Republic of Macedonia. Various IEA and World Bank estimates point to potential savings in the WB6 of up to 10% in the transport sector, 10‑35% for households, 35‑40% in the public sector, 10-30% in services and 5‑25% in industry and commerce.

Tapping it will contribute towards much-needed economic growth and reduce reliance on imported hydrocarbons. In monetary terms, public buildings and households alone could yield savings valued at €805 million by 2020 according to the Energy Community. Delivering such savings would have a significant impact on trade balances and public and household budgets, enhance energy security, protect against necessary energy tariffs adjustments, and contribute to economic growth.

Through their membership of the Energy Community, the Western Balkan countries have already committed to adopting EU Energy Efficiency rules, norms and standards. Transposition is on its way. In 2009, the Energy Community recognised the importance of energy efficiency and decided to incorporate the relevant EU directives into its legal framework. Energy Community members must thus implement three Directives: Energy Efficiency, Energy Performance of Buildings, Energy Labelling of Products.

However, a proper legal transposition of the energy efficiency legal framework alone will not bring the significant changes needed to realize the energy saving potential of the Contracting Parties. Durable impact can only be achieved through investments both by public sector institutions and private actors with commercial and International Financial Institutions (IFIs) financing. The necessary efficiency investment must be financed for the potential to be harvested.

The EC, the Energy Community, the WBIF, IFIs and bilateral donors are providing technical assistance to beneficiary countries to facilitate compliance. Energy efficiency projects typically entail significant up-front spending, subsequently recovered through savings on energy expenditures achieved over a long period. Availability of long term financing to financial intermediaries with a good appreciation of the economics of energy efficiency investment is thus necessary to support the sector.

The EU, international financial institutions, and donors have all made substantial contributions to making dedicated energy efficiency finance available and affordable. Their contribute has been essential in opening the market in the past ten years, through the provision of long-term funding, technical assistance and incentives. They still provide most of the available funding to commercial banks. Some commercial banks fund their own energy efficiency initiatives, usually in smaller volumes and often after an initial learning phase using official funding and technical assistance.

While the interest in energy efficiency is still recent and the regulatory framework incomplete, the financing offering in the region is already significant and diversified. Active Energy Efficiency facilities focusing on the region and supported by development institutions and/or donors represent cumulative funds in excess of €750 million in 2016.

Most facilities rely on local financial intermediaries to identify and implement projects using funds provided by the facilities. Approximately 45 commercial banks or financial institutions offer energy efficiency of renewable energy financial products in the region. They target mostly the corporate, SME sector and household sectors and more infrequently the public or agricultural sector. Some facilities can also lend directly to larger projects.

The largest facilities, GGF and REEP, are regional in scope. All the others are more restrictive, usually targeting a single country. Among country facilities, Serbia is the principal country of destination, followed by Kosovo and Bosnia and Herzegovina. Facilities are being used at a brisk pace, with approximately €145 million left available in 2016 for new projects.

Lastly, on 09 Feb 2017, European Neighbourhood Policy and Enlargement Negotiations Commissioner Johannes Hahn signed an agreement in the amount of 50 million euros with international financial institutions (EBRD, EIB and KfW) at the Western Balkan 6 energy ministerial in Skopje. The grant will assist Western Balkan 6 governments in preparing or upgrading their energy efficiency laws, support energy efficiency measures, help municipalities to attract private investment in the public sector and, finally, provide incentives to soften the investment burden on consumers.

In addition, the EC is providing a €30 million grant to implement the next phase of the Regional Energy Efficiency Programme (REEP) which aims to unleash the energy efficiency and renewable energy potential of the Western Balkans Six. The REEP programme encourages the private and public sectors to take a leading role in promoting energy efficiency as envisaged in countries’ national energy efficiency action plans, developed as part of the Energy Community process.

However, the money is not the only factor at play. There are still many barriers to the uptake of energy efficiency measures, primarily of a legal and regulatory nature. A significant amount of additional technical support and assistance is dedicated to assisting the countries in overcoming these barriers via project preparation assistance, information and awareness raising campaigns, etc. In more, scaling up energy efficiency in all economic sectors, including industry, buildings, transport and services, will require that additional barriers are removed and a large enough market for energy services is developed.

There is also working to create the right framework to encourage efficiency investments, and to build up capacity to manage these investments. The emphasis so far has predominantly been on the corporate sector, particularly SMEs. Attention devoted to the public sector or households is more limited, despite their strong potential for realising significant energy savings. A number of reasons can explain the situation, including the lenders ‘perception of associated risks and procurement difficulties in the public sector.

Among the broad range of products already available, most involve incentives, from investment grants to the final client to incentives paid to financial intermediaries and risk sharing schemes lowering the cost of capital. EE officials from the WB6 countries consider incentives necessary given local living standards and economic conditions, high investment costs and long payback periods, high market interest rates, incomplete regulatory frameworks, subsidised energy prices and low levels of awareness in most market segments, particularly in the residential/household segment.

Financial institutions consider that incentives are part of the mix required for successful energy efficiency schemes. International experience shows that concessional finance plays a critical role where market barriers are present and restrict the scale of commercial lending. Grants help significantly to scale up the market and reach ambitious targets to be adopted in the region.

The banking sector in the region can be reluctant to invest when project bankability is adversely affected by low energy tariffs, lack of consumption-based billing, absence of adequate legal structures facilitating lending for multi-owners building renovation, or when the long term funding required by energy efficiency loans is scarce. The perception of sector-specific risk is usually high within commercial banks, particularly for residential projects, and the management commitment in local banks is not always very strong.

Then, much more remains to be done if the countries of the Western Balkans are to reach EU energy efficiency standards. The regulatory framework must be improved to facilitate investment. Initiatives are needed to bring in new actors and impact markets such as the residential sector or develop waste-to-energy. The region’s leaders should embrace the ‘energy efficiency first’ principle to improve their countries’ energy security and seems that this is only the beginning of the EU’s engagement in this sector.

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