Europeans spend up to 90% of their time indoors, and heating and cooling buildings are responsible for 40% of the energy consumption in the EU. Making buildings and industry more energy efficient has been at the core of the EU's energy policy and climate change mitigation agenda since 2012. But despite compelling statistics and Brussels' efforts, consumers and banks have been slow to warm up to the idea of energy efficiency in Central and Eastern Europe.
A factor that helps explain its lack of appeal is the fact that energy efficiency is not a concrete – or novel – technology like wind or solar power, but rather a goal to reduce energy wastage on both the consumption and production sides in industry, residences, public buildings, power generation and many other areas. Few energy-saving technologies are cutting edge; the majority, such as tight building envelopes and fuel-efficient boilers, are tried and tested solutions. So the practice of building or renovating existing structures and processes to make them more energy efficiency does not have the halo of innovation that accompanies many investments deemed worthwhile.
The lack of appeal to consumers of negawatts – as energy efficiency has been dubbed – has even prompted economists to coin a term, namely the energy efficiency gap, for people's failure to invest in energy efficiency even when it makes financial sense for them to do so. Meanwhile, commercial banks have been slow to jump at the opportunity to finance small-scale energy efficiency projects, particularly residential home retrofits, because the return on investment for them tends to be low.
EBRD and energy efficiency
To counteract some of the barriers to the adoption and financing of energy efficiency, the EBRD has been an important driver of finance for this in the CEE region for more than a decade. The lender launched its sustainable energy initiative (SEI) in 2006, six years before the EU passed its Energy Efficiency Directive aiming to help the bloc cut energy consumption by 20% by 2020.
The SEI gradually evolved into a broader resource efficiency agenda that also encompasses waste minimisation and water efficiency, and culminated in a more comprehensive Green Economy Transition (GET) policy launched in 2016.
"Market transition is at the core of what the EBRD does. And the GET approach is an explicit recognition of the fact that a well-functioning market economy has to use its resources sustainably and protect the environment," Terry McCallion, Director for Energy Efficiency and Climate Change at EBRD, tells bne IntelliNews in an interview. " At the EBRD we have a long track record of supporting climate and resource efficiency projects. The GET builds on this by expanding the focus to investments in environmental standards, energy efficiency in public buildings, innovation and technology transfer to pilot and scale up technologies that do not have a significant market share yet," he adds.
The approach is beginning to show results. Up until 2006, investments in environmental projects represented approximately 12% of the EBRD's investment portfolio. The proportion of such investments has increased to a third of the total financing in 2016 and the goal, under GET, is to reach 40% by 2020.
Furthermore, under the GET, the projects that the EBRD has helped finance represent savings of 85mn tonnes of CO2 equivalent, 70mn cubic metres (cm) of water and 2mn tonnes of waste per year. Because the EBRD was an early advocate of energy efficiency, this area continues to account for a large share of its investments in clean energy – namely two thirds of the €22bn the bank has invested in sustainable energy projects to date. However, that is not to say that EBRD is prioritising energy efficiency over renewable energy. In fact, starting in 2014, investments in the latter have exceeded those in energy efficiency.
Both McCallion and Harry Boyd-Carpenter, Director of Power and Energy Utilities at EBRD, agree that energy efficiency is an important piece of the puzzle that is the energy transition in CEE. There is still significant potential for energy efficiency gains and high-return investments to be made in this area in CEE. Boyd-Carpenter believes that refurbishing old public buildings has great potential for energy savings. "There are a lot of publicly-owned buildings in CEE and in neighbouring countries that need to be refurbished to meet minimum energy efficiency performance standards".
Achieving energy efficiency is possible at many levels. The EBRD, for instance, works with entities such as railways companies, airports, shopping malls and steel manufacturers to reduce their energy consumption.
According to McCallion, "clients rarely walk through the door with a well-developed idea of what type of projects they want". So when the EBRD works directly with private companies or municipalities on energy efficiency projects, the first step is often to engage through a resource audit to identify where green investment opportunities are and what capital investments are necessary, McCallion says.
However, the EBRD also works with local banks to make financing available for retrofits in residential buildings. "We want to mainstream energy efficiency in all these area by promoting the right products at the right time in the right sectors. The market penetration of technologies like high-performing insulation and condensing boilers is close to 0% in some of the countries where we invest. The EBRD has been at the forefront of funnelling investments, structuring products and setting up financial schemes through local banks in all of these areas. At some point, we want to step back and let the market kick in and take responsibility for energy efficiency," McCallion says.
To that end, the EBRD has invested €3.88bn, an amount larger than its total investments in renewable energy to date, to set up the so-called Sustainable Energy Financing Facilities (SEFF), which are credit lines for energy efficiency and renewable energy projects through local banks and other financial institutions.
According to McCallion, "through the SEFFs, we are essentially building on the distribution capacity of our local partner banks for small loans to finance energy efficiency investments in the residential and business sectors. We work with 120 banks across the region and have implemented SEFFs in 24 countries, including Poland, the Slovak Republic, Romania and Bulgaria".
The EBRD invests approximately €500mn per year in such credit lines. "Once you prove to local banks that this business model works, it is very powerful. Working with local banks is the key way to getting the private sector to finance energy efficiency projects," McCallion says, adding that, through the SEFFs, the EBRD reaches tens of thousands of housing associations in CEE.
Switching to cleaner power generation is the second piece of the puzzle of the sustainable energy transition in CEE. The rapid development of wind and solar power in the last two years, driven by China and Germany, means that these forms of power generation have now reached grid parity in many places. However, the progress in adopting more renewable energy sources has been chequered in the region. On the one hand, frontrunners such as Croatia and the Baltic countries have increasingly incorporated biomass, hydropower and solar power into their energy mixes to the point where they now account for up to 40% of the power mix in those countries.
On the other hand, Poland continues to rely on carbon-fired thermal power plants for some 85% of its power generation. Based on the country's new energy policy, little will change between now and 2030, when carbon will continue to account for 74% of electricity generation. Furthermore, recent policies requiring 2-km buffer zones between onshore wind farms and residences and forests will continue to hamper the adoption of wind power.
Clean energy activists in CEE complain that legislative confusion related to subsidies for RE, together with entrenched industrial practices, low purchasing power, as well as a lack of public engagement with, and little political interest in, RE are preventing the region from reaping the benefits of the solar and wind revolution currently underway.
But Boyd-Carpenter disagrees that things are that dire. "It is clear that RE is becoming a more important part of the power sector across the entire region. The countries where the EBRD works are heterogeneous. Some are in the early stages of transitioning to clean energy, others are more advanced." Conceding that "the picture is very fragmented when you get down to the detail", Boyd-Carpenter believes that some of the problems that wind farm operators have been experiencing with green certificates in countries such as Romania recently are a part of the development process. "At any point in time, some areas will be doing well, and others will not. But there are lots of good things happening in all of these countries and we try to align ourselves with those policies that make sense and help push them forward," he elaborates.
Looking ahead, Boyd-Carpenter expects that solar energy will begin to catch up with wind power in CEE. "In many of the countries in CEE that have potential for wind power, like Poland, Bulgaria and Romania, the wind sector is fairly mature and has a reasonably high level of market penetration, so we do not anticipate growth at the same rates as before," he explains. "Solar, however, is hard to predict. It is an industry where the price is moving at an extraordinary pace. Turkey, Greece, Poland and Ukraine are all likely to be important solar markets but the industry is moving so fast, that it is dangerous to predict where the next solar market will be," he adds.
Completing the puzzle
Big Data is the third piece of the sustainable energy transition puzzle, in Boyd-Carpenter's view, as technologies such as smart metres will enable electric utilities and other actors to better manage energy flows by understanding consumption patterns. "The opportunity to decarbonise the economy is very much driven by technology, which is changing very fast. We now have access to huge amounts of computing power at low costs. We think that this will revolutionise power networks, and it will also make it easier to incorporate renewable energy into the grid," he says.
Promising as clean energy sources might be, hydrocarbons will continue to play an important role in Europe's energy mix looking ahead. If the EU meets its 2030 target of achieving a 27% share of RE in energy consumption and a 27% reduction in energy consumption, that will mean that hydrocarbons will continue to account for up to two thirds of energy consumption.
And, while renewable energy and energy efficiency account for the lion's share of EBRD's investments in new energy generation infrastructure, the bank continues to invest in some hydrocarbon-based projects. For instance, the bank is considering lending Croatia's Hrvatska Elektroprivreda (HEP) €65mn for the construction of a gas-fired combine heat and power (CHP) unit. That is to say nothing of its negotiations with the governments of Azerbaijan and Turkey to finance two inter-connected gas pipelines, the Trans Anatolian and Trans Adriatic pipelines, to the tune of €1.5bn.
Critics, such as environmental activism network CEE Bankwatch Network, have been quick to criticise the bank for such investments. However, Boyd-Carpenter believes that vilifying all hydrocarbons is not a constructive – or realistic – stance. "In all forecasts, hydrocarbons will remain a material part of the energy mix for some time, not least because of the need to balance intermittent renewable power. You cannot say that all gas is wrong. We look at each project individually to decide whether it is sustainable, based on its specifics. The critical question for us, when we invest in a hydrocarbon project, is to be confident that it is consistent with a sustainable path and a low-carbon transition in the country where it is being built," he concludes.