62350 THE CONTENTS OF THIS REPORT ARE PROTECTED BY COPYRIGHT Neither this report nor its parts may be reproduced, copied or distributed in any form without reference to the IFC. IFC encourages dissemination of this publication and hereby grants permission to the user of this work to copy portions of it for the user’s personal, noncommercial use, without any right to resell, redistribute, or create works derived from the contents or information contained herein. Any other copying or use of this work requires the express written permission of IFC. The materials contained in this report are presented as an overview of results from surveys conducted among industrial enterprises in Armenia, Azerbaijan, Belarus, Georgia and Ukraine during the summer of 2008, and in Russia in 2006. The information in this report is presented in good faith for general information purposes, and IFC, the World Bank Group, shall not be held liable for any of the information contained herein. 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All information and materials used in preparing this report are the property of and archived by IFC. 2010 International Finance Corporation The report is available in electronic form at the following address: www.ifc.org/eesurveys Energy Efficiency: A New Resource for Sustainable Growth RESEARCHING ENERGY EFFICIENCY PRACTICES AMONG COMPANIES IN ARMENIA, AZERBAIJAN, BELARUS, GEORGIA, RUSSIA, AND UKRAINE 2010 3 Table of Contents Executive Summary...................................................................................5 1 Energy Consumption and Energy Efficiency in the Survey Countries .... 9 1.1 Energy Intensity in the Survey Countries ............................................9 1.2 Economic Growth in the Survey Countries .......................................10 1.3 Overview of the Industries Surveyed .................................................11 1.4 Energy Consumption by the Industries Surveyed ..............................12 2 Prioritization and Understanding of Energy Efficiency Potential......... 15 2.1 Prioritization of Energy Efficiency .....................................................15 2.2 Managers’ Awareness of Energy Efficiency .........................................16 3 Recent and Planned Investments in Energy Efficiency ......................... 20 3.1 Recent Investments in Energy Efficiency ........................................... 20 3.2 Planned Investments in Energy Efficiency ......................................... 22 4 Incentivizing, Planning, and Evaluating Energy Efficiency Investments...........................................................................24 4.1 Government Incentives and Requirements ........................................ 24 4.2 Management Incentives and Requirements ....................................... 25 4.3 Energy Efficiency Plans ..................................................................... 26 4.4 Energy Audits ................................................................................... 27 4.5 Energy Metering ............................................................................... 28 5 Project Financing of Energy Efficiency .................................................29 5.1 Financial Barriers to Energy Efficiency .............................................. 29 5.2 Financing of Energy Efficiency Measures........................................... 30 5.3 Payback Periods and Loan Periods for Energy Efficiency Measures .... 31 6 Conclusions and Recommendations .....................................................33 6.1 Summary of Key Survey Findings ..................................................... 33 6.2 Recommendations to the Main Actors in Energy Efficiency in the Six Countries Involved ............................................ 36 Appendix A: Survey Methodology ............................................................. 38 4 4 Foreword Energy ef ciency is an important development priority for IFC due to the rapidly increasing demand for energy, growing supply constraints, and related concerns over the environmental and health effects of pollution. We have the potential to reduce global energy demand growth by at least half - the equivalent of 64 million barrels of oil a day1 - by signi cantly increasing investments to improve worldwide energy ef ciency: estimates suggest $170 billion annually through to 2020. Increasing energy ef ciency is also critical to reducing greenhouse gas emissions, which in turn is critical to stopping and mitigating the effects of climate change. IFC, as part of its mandate to promote sustainable development in the private sectors of developing economies, promotes the ef cient use of energy in industrial enterprises. The long-term competitiveness of small, medium and large enterprises is crucial if the private sector is to continue to grow. Businesses that implement energy ef ciency (EE) measures can reduce the share of energy costs in their operations and make all the difference in determining their long-term success and viability. This report contains the ndings from a survey carried out among industrial enterprises in Armenia, Azerbaijan, Belarus, Georgia and Ukraine during the summer of 2008, and in Russia in 2006. The survey, conducted through a detailed questionnaire and face-to-face interviews with the management of the enterprises sought to obtain a picture of how industrial enterprises in these countries manage and nance energy ef ciency improvements. This report presents and analyzes survey results on managers’ attitudes toward, and knowledge of, energy ef ciency measures (Chapter 2); companies’ historical and planned use of energy ef ciency measures (Chapter 3); the ways in which energy savings are incentivized, planned, and evaluated in the survey countries (Chapter 4); and the ways in which companies pay for investments in energy ef ciency (Chapter 5). Chapter 6 draws conclusions from Chapters 1-5 and recommends areas for further work by industry, government and nancies to increase energy ef ciency. 1 McKinsey Global Institute, February 2008 5 Executive Summary This report summarizes and analyzes the results of energy efficiency surveys undertaken This report summarizes by IFC in the industrial sectors of six countries: Armenia, Azerbaijan, Belarus, Georgia, the results of surveys in Russia, and Ukraine (the “survey countries”). six countries The survey assessed how industrial enterprises in each of the survey countries prioritize, understand, plan, finance, and implement energy efficiency investments. The resulting analysis is intended to help governments, financial institutions, companies, donors, and private investors identify opportunities to provide goods and services that improve energy efficiency. The industrial sectors surveyed were the food, chemical, building materials, metal processing, and machine building industries.1 The survey countries are some of the most energy-intensive economies in Europe and The survey countries Central Asia. Of 35 countries in Europe and Central Asia, two of the survey countries are some of the most (Ukraine and Russia) rank within the top five in terms of energy intensity. Four of the energy-intensive in the survey countries (Ukraine, Russia, Belarus and Azerbaijan) rank within the top 10. region Energy intensity in these countries has decreased over the past decade, primarily because of Gross Domestic Product (GDP) growth. Prior to the global financial crisis, growth in the survey countries ranged from seven to 17 percent annually, from 2000 to 2007. GDP per capita roughly doubled in each country over the same time period. The following table summarizes the key energy efficiency indicators for the surveyed companies in each country. *The survey in Russia was conducted in 2006. The situation has changed significantly with the enactment of the Law on Energy Saving and Improving Energy Efficiency in 2009. Nearly half of respondents in every survey country stated that improving energy efficiency Managers in the survey is one of the main priorities for their business. Armenian companies were least likely to countries say consider energy efficiency a priority, and Georgian companies the most likely. Sectors energy efficiency is a that had higher energy costs as a proportion of total costs were more likely to assign a priority … higher priority to improving energy efficiency. This was the case in Ukraine, Belarus, and Armenia, and was true for most sectors in Azerbaijan and Georgia. Most survey respondents felt that company management had a good understanding of 1 Different industries were surveyed in Russia. These were: light industry, wood processing, meat and dairy processing, bakery and confectionary, and metal working and machine building. 6 EXECUTIVE SUMMARY … and feel they energy costs, and more than 90 percent thought management had at least an approximate understand its understanding. Most respondents also believed management in their companies to importance … be generally informed or well informed about opportunities for improving energy efficiency. ...but underestimate Respondents almost always underestimated the potential benefits of energy investments potential energy to their companies. Managers in Azerbaijan, Belarus, Georgia, and Russia, which gave savings the highest estimates of potential energy savings, underestimated potential benefits by an average of 40 percent. In Armenia and Ukraine the underestimations were greater, with most managers underestimating energy savings potential by more than 65 percent. Metering is important for monitoring and evaluating the implementation of energy efficiency measures. Fewer than 20 percent of the companies surveyed had metering in place at the division level or at the level of individual equipment. Many respondents indicated they were investing in metering upgrades, but these companies were in countries (Belarus, Russia, and Ukraine) in which the metering stock was already highest and at the finest level of granularity (at the division and equipment levels). Like metering, energy audits are important for identifying where energy can be saved. However, few respondents (fewer than half in all countries except Azerbaijan) conduct energy audits. Many companies have More than two thirds of the companies surveyed in each country had implemented implemented energy one or more energy efficiency measures in recent years. Roughly half of the companies efficiency measures … surveyed had implemented three or more measures. Most of the energy efficiency measures adopted in recent years have been low-cost or no- … but prefer no-cost cost measures (administrative or organizational measures). Energy-efficient lighting was or low-cost measures the most common or second most common energy efficiency measure that companies implemented during 2006–07. Of the no-cost measures, the most common was the appointment of a specific employee responsible for energy efficiency. No- and low-cost measures are attractive because they have short payback periods and do not require significant budgetary allocations. Planned investment Most companies in the survey countries have plans to increase their investments in in energy efficiency is energy efficiency substantially. Figure below compares companies’ planned investments substantial … to their historical investments, by country.2 HISTORICAL AND PLANNED INVESTMENT IN ENERGY EFFICIENCY (In USD, millions) … but the average Investment plans reflect the same preference for low-cost energy efficiency investments value of planned as seen in the past. Most survey respondents were planning to invest relatively small investments is small … amounts (less than $50,000) in energy efficiency. Only a small proportion of respondents plan to spend more than $500,000 over the period: 13 percent in Armenia and Russia, 15 percent in Ukraine, and 24 percent in both Azerbaijan and Georgia. 2 This is based on investment plans put forward by companies prior to the impacts of the global financial crisis of 2008–2009. The current appetite for energy efficiency investments may have changed EXECUTIVE SUMMARY 7 Formal planning for energy efficiency - and incorporating this into business strategy - is … and not integrated uncommon in most of the survey countries. Only 29 percent of the companies surveyed into broader business in Armenia, and 24 percent of the companies surveyed in Azerbaijan and Georgia had strategies developed and executed an energy efficiency plan. In contrast, in Belarus roughly 80 percent of the companies surveyed had developed an energy efficiency plan. All of the countries in the survey, except Georgia, have passed national legislation related Energy efficiency to energy efficiency. Most also have a national policy outlining the plan or strategy policy is developing... for achieving the country’s energy efficiency potential. In Belarus, in particular, a comprehensive energy efficiency law appears to be one of the most important reasons for the substantial gains in energy efficiency in recent years. However, many respondents felt that existing legal frameworks did not promote energy … but many efficiency in their country. In the six survey countries, between 19 percent (in Russia) and government measures 50 percent (in Belarus) of respondents indicated that the existing framework successfully are ineffective promoted energy efficiency. Most respondents said their companies were not investing in energy efficiency because Managers cited a lack of financial barriers. More than half of survey respondents said that a lack of internal of internal funds, or funds prevented them from making investments in energy efficiency. Roughly 20 percent external financing, as a of respondents said that they had difficulty attracting external financing for projects. barrier … Twenty percent of respondents indicated that other barriers (organizational or technical) prevented them from investing in energy efficiency3. Only 15 to 35 percent of respondents actually sought outside financing for their … but the minority projects. Respondents who sought financing for their energy efficiency investments of respondents were generally quite successful in finding it. In Belarus, Georgia, Russia and Ukraine, who sought outside more than 80 percent of respondents who sought outside financing for energy efficiency financing found it … projects received the financing they sought. The expected payback periods for planned investments are longer than the payback and loan tenors are periods on investments in the recent past, suggesting that companies are making more keeping step with substantial energy efficiency investments (with higher capital costs). The surveys also longer payback suggest that loan tenors are generally keeping pace with with the payback periods of periods … planned investments. The surveys show some promising findings for energy-efficient goods and services, but Conclusion: a mix also substantial challenges. of promise and challenges The following findings are promising: • Managers say they view energy efficiency as a priority. As noted above, most Some promising trends of the managers surveyed view energy efficiency as one of their business’s top three priorities. • Planned investment in energy efficiency is substantially higher than historical levels. As shown above, respondents in all of the survey countries plan to invest more in energy efficiency than they have in recent years. Three of the survey countries plan to invest many multiples more than they have in recent years. • Payback periods are increasing. Longer payback periods suggest that there is a movement from no-cost and low-cost measures toward more substantive, capital-intensive measures with greater overall savings potential. • Lenders have more knowledge of, and are more comfortable with, energy efficiency investments. As described above, most respondents who had applied for financing for energy efficiency investments received it. Moreover, loan durations are keeping pace with payback periods, suggesting that lenders are not only willing to meet the need for financing in general, but are also increasingly willing to extend longer-term loans for larger, more substantial projects. • Better incentives, monitoring, auditing, and planning means a higher likelihood of obtaining finance. A higher percentage of respondents in Belarus 3 Organizational or technical barriers include: problems evaluating projects; lack of experience in developing projects; and the necessity of obtaining a permit or consents from the government. 8 EXECUTIVE SUMMARY said their companies applied for and received external funding for energy efficiency, in comparison with respondents in other countries. Companies in Belarus are also better equipped in terms of metering, are more likely to conduct energy audits, and are more likely to integrate energy efficiency into their other business plans. Together, these factors suggest that better monitoring and planning can help facilitate access to financing. • Government incentives for energy efficiency can help. The survey shows that companies in Belarus are some of the most active in planning, implementing, and financing energy efficiency investments. Respondents in Belarus were also more positive about the effectiveness of government energy efficiency measures than respondents in other countries. Although Belarus is one of the most energy intensive economies in the region, it still can serve as an example for other countries to follow when trying to promote energy efficiency through effective government policy. The usual challenges • The challenges revealed by the survey mirror the usual list of “barriers” to energy efficiency, namely: informational, financial, and legal/regulatory. • Company managers and financiers do not have enough, or do not have the correct knowledge of, energy efficiency investments and potential. • Company managers are limited (or, at least, perceive they are limited) to using their own funds for investment instead of outside financing. This limits the size and scope of energy efficiency investments. • Laws, regulations, and incentives for energy efficiency are generally ineffective, and may even discourage energy savings4. Recommendations The trends and challenges described above point to a number of recommendations for further work by industry, governments, and financiers. These recommendations are summarized below. Industry can … • Increase awareness: increase the awareness of company managers and staff of the benefits of energy efficiency. • Provide incentives: provide incentives for staff to reduce energy consumption. • Integrate planning: ensure that the company has an energy efficiency action plan, and that this plan is integrated with other company plans and procedures. • Improve information: upgrade metering equipment and use energy audits. • Finance: apply for loans that allow the company to save more energy, sooner than would be possible with internal funds. Government can … • Implement the legal framework: governments must ensure that the legal framework for energy efficiency is effective—in other words, that the necessary measures are designed, funded, and appropriately enforced to achieve the objectives • Remove other obstacles: the survey shows that there is a substantial lack of information on energy efficiency practices and benchmarking, energy consumption metering and database as well as coordinated effort between policy makers and consumer groups, hindering the efforts to invest in energy efficiency. Financiers can … • Educate: improve company managers’ understanding of the impact of energy efficiency measures on a company’s financial standing, and the benefits of utilizing external financing. • Develop products: foster the creation of relevant financial products and services. • Help with applications: create clarity around application requirements, and streamline processes. • Support projects: assist companies with the design and evaluation of energy efficiency projects. 4 For example, in several countries (Belarus and Azerbaijan, in particular), cumbersome and time- consuming procedures to obtain permits and licenses were seen by a significant proportion of respondents as a barrier to implementing energy efficiency projects. ENERGY CONSUMPTION AND ENERGY EFFICIENCY IN THE SURVEY COUNTRIES 9 1 Energy Consumption and Energy Efficiency in the Survey Countries This report summarizes and analyzes the results of energy efficiency surveys undertaken by IFC during 2008 in Armenia, Azerbaijan, Belarus, Georgia and Ukraine, and in Russia in 20065. The purpose of the surveys was to analyze how industrial enterprises in each of the survey countries prioritize, understand, plan, finance, and implement energy efficiency investments. The analysis is intended to help governments, donors, and private investors identify opportunities to provide goods and services that improve energy efficiency in the industrial sectors. This first chapter sets the stage for the analysis in subsequent chapters. It provides a brief overview of: • aggregate energy intensity in the survey countries; • recent economic growth in the survey countries; • the industries surveyed; and • energy consumption by the industries surveyed. The subsequent chapters summarize and analyze survey results on managers’ attitudes toward, and knowledge of, energy efficiency measures (Chapter 2); companies’ historical and planned use of energy efficiency measures (Chapter 3); the ways in which energy savings are incentivized, planned, and evaluated in the survey countries (Chapter 4); and the ways in which companies pay for investments in energy efficiency (Chapter 5). Chapter 6 draws conclusions from Chapters 1-5 and recommends areas for further work by industry, government and financies to increase energy efficiency. 1.1 Energy Intensity in the Survey Countries The countries surveyed in this study (the “survey countries”) represent some of the most energy-intensive (and hence least energy-efficient) economies in Europe and Central Asia. Of 35 countries in Europe and Central Asia, two of the survey countries (Russia and Ukraine) rank within the top five in terms of energy intensity. Four of the survey The countries surveyed countries (Azerbaijan, Belarus, Russia, and Ukraine), rank within the top 10. All but are some of the most one of the survey countries (Armenia) rank within the top 18 energy intensive econo- energy intensive in the mies in the region. Figure 1.1 shows the energy intensities of the survey countries in region comparison with selected European countries. Figure 1.1: COMPARISON OF ENERGY USE PER UNIT OF GDP Energy use per unit of GDP, ECA, 2006 (kg of oil equivalent per constant 2005 PPP $) Source: World Bank Development Indicators Database. 5 Appendix A summarizes the methodology used for the survey. 10 ENERGY CONSUMPTION AND ENERGY EFFICIENCY IN THE SURVEY COUNTRIES GDP growth in the 1.2 Economic Growth in the Survey Countries region has driven reductions in energy Energy intensity in the survey countries has declined steadily in recent years but remains intensity high relative to that of their regional peers. Improvements in energy intensity can generally be attributed to the increased use of existing productive capacity rather than improved efficiency of energy use. Prior to the global financial crisis, all of the survey countries experienced consistently high levels of economic growth. Growth ranged from seven to 17 percent annually from 2000 to 2007. Gross Domestic Product (GDP) per capita roughly doubled in each country over the same time period. Economic growth was driven primarily by the following. • Exports. Industrial exports contributed to economic growth in Armenia, Georgia, and Ukraine. Oil and gas exports contributed to growth in Azerbaijan and Belarus. • Expansion of certain large sectors. Expansion of the oil and gas sectors in Azerbaijan, and the service and construction sectors in Armenia and Georgia, contributed to economic growth. The global financial crisis hit many of the survey countries hard, and was felt by this region more than any region in the world. Box 1.1 summarizes the impact of the global financial crisis in the survey countries. Box 1.1: Economic Impacts of the Global Financial Crisis The global financial crisis hit countries in Europe and Central Asia harder than any other region. Azerbaijan is the exception, where GDP is expected to grow by 7.4 percent in 2010. Economic growth slowed or contracted in all of the survey countries in 2009. The figure below shows changes in GDP growth over the past decade in the six survey countries. GDP Growth in the Survey Countries, 2005– 2010 (projected) The impact of the financial crisis varied from country to country and depended primarily on how the largest sectors of each country’s economy were affected. Important impacts of the crisis in each country included the following. • Armenia. Sectors hardest hit included: real estate, metallurgy, manufacturing, and construction. Unemployment rose to seven percent. Remittances, which account for roughly 20 percent of GDP, fell by nearly 30 percent by the end of May 2009. The local currency depreciated by roughly 30 percent. • Azerbaijan. Sectors hardest hit included: oil and construction. The National Bank of Azerbaijan reduced refinancing rates to provide better access to liquidity for the under-developed banking system. The National Bank also guaranteed nearly all deposits. Source: IMF World Economic Outlook, 2009. IFC Country Reports on Energy Efficiency, available at: http:// www.ifc.org/eesurveys. Figure: 2000–08 data: World Development Indicators. 2009–10 data: IMF World Economic Outlook, 2009. ENERGY CONSUMPTION AND ENERGY EFFICIENCY IN THE SURVEY COUNTRIES 11 • Belarus. Many companies found access to credit and loan facilities restricted or unavailable as a result of the crisis. However, the economy experienced modest growth as a result of the large state presence (roughly 75 percent) in the economic structure. • Georgia. Investments fell sharply. The banking sector experienced liquidity problems. Public revenues fell, and unemployment increased. • Russian Federation. Heavy reliance on the price of a single commodity and a major decline in Russian financial markets contributed to a 7.9 percent drop in GDP in 2009. Heavy crude oil lost more than 70 percent of its value from July 2008 to November 2008. By September 2008, the RTS stock index had fallen almost 54 percent since the beginning of the year, amounting to a roughly 1 trillion loss in share values. • Ukraine. Sectors hardest hit included: finance and steel. Industrial production lost roughly one third of output in the first nine months of 2009. The local currency depreciated by 51 percent. Growth in the region is expected to recover moderately (by 1.2–2.7 percent) in 2010 and to improve further in subsequent years. The 2009 IMF World Economic Outlook forecast growth for most of the survey countries at 1.2-2.7 percent in 2010, with Azerbaijan the outlier, at 7 percent. The 2010 World Economic Outlook forecast average growth for the CIS at 3.8 percent in 2010 and 4 percent in 2011. 1.3 Overview of the Industries Surveyed Five industrial sub-sectors (food processing, chemicals, building materials, metal processing, and machine building) make up 56 to 57 percent of the total industrial output in Armenia, Belarus, Georgia, and Ukraine. These sub-sectors contribute 18 to 29 percent of GDP in all of the survey countries except Azerbaijan. In Azerbaijan, the oil and gas sub-sector is the dominant contributor to GDP. Figure 1.2 illustrates the contribution of the five industrial sub-sectors to GDP. Figure 1.2: INDUSTRIAL OUTPUT (% OF GDP), BROKEN DOWN BY INDUSTRIAL SUB- SECTOR Source: National Statistical Agencies in each country. 12 ENERGY CONSUMPTION AND ENERGY EFFICIENCY IN THE SURVEY COUNTRIES 1.4. Energy Consumption by the Industries Surveyed The cost of energy consumption varies considerably by industry and by country. Figure 1.3 shows, for each survey country, the average energy cost per company. Figure 1.3: AVERAGE ENERGY CONSUMPTION PER COMPANY (In USD, ‘000) The costs of energy consumption are highest in Ukraine, and - as would be expected - generally highest for medium and large companies. 1.4.1 Specific Energy Costs as a Proportion of Total Costs Specific energy costs - the ratio of energy costs to total operating costs - are the most important factor for companies in considering energy efficiency measures. As Figure 1.4 below illistrates, specific energy use differs by country and industry: Ukraine generally has the highest energy costs across all sectors, while Armenia and Belarus have the lowest. Figure 1.4 shows the energy costs, as a proportion of total operating costs, faced by survey respondents. Figure 1.4: ENERGY COSTS AS A PROPORTION OF TOTAL OPERATING COSTS IN SURVEY COUNTRIES ENERGY CONSUMPTION AND ENERGY EFFICIENCY IN THE SURVEY COUNTRIES 13 The food processing and machine building sectors face the lowest energy costs as a percentage of total operating costs, and the chemical processing and building materials production sectors the highest. 1.4.2 Prices for Oil, Gas, and Electricity Energy input prices are generally higher in those countries with lower energy costs as a percentage of total operating costs6. This is not surprising, as energy prices are important drivers of energy efficiency. Subsidized or otherwise, artificially low energy prices are a disincentive for energy efficiency measures. Energy prices are also important because, together with consumption, they drive energy cost, and subsequently have a significant impact on the competitiveness of businesses. The survey countries enjoyed access to cheap fuels for many years. This has been achieved through fuel cost subsidies from the government (Armenia and Azerbaijan)7; a preferential trade regime which has included very cheap fuels (Belarus);8 and significant domestic energy resources (Azerbaijan and Russia). Over the past five years, many of the survey countries have raised electricity and gas tariffs two or three-fold. Figure 1.5 and Figure 1.6 illustrate the change in gas and electricity tariffs faced by industrial consumers in each of these countries over the period 2005–09. The figures on the right-hand side show the increase in tariffs over this period. Figure 1.5: INDUSTRIAL GAS TARIFFS (USD, 1000m3) Source: National Statistical Agencies, Ministries of Energy, World Bank publications. 6 Ukraine is the exception, where, because of the predominance of heavy industry, energy tariffs are high and specific energy costs are higher than in the other survey countries. 7 Subsidies ceased in Armenia in 2008 but remain in Azerbaijan. 8 This regime ended in 2006, and a timetable was agreed such that Belarus will face international energy prices for energy imports by 2011. 14 ENERGY CONSUMPTION AND ENERGY EFFICIENCY IN THE SURVEY COUNTRIES Figure 1.6: INDUSTRIAL ELECTRICITY TARIFFS (USD / MWH) Source: National Statistical Agencies, Ministries of Energy, World Bank publications. The figures show that Georgian industry faces the highest gas tariffs, and almost the highest tariffs for electricity. At the other end of the spectrum, both gas and electricity tariffs in Azerbaijan remain low (as a result of continuing subsidies), at only about one quarter to one third of the tariffs faced by Georgian businesses. The data suggest that high tariffs are not an impediment to cost competitiveness. Companies in Georgia face among the highest electricity and gas prices, but do not have higher specific energy costs than companies in the other survey countries. In contrast, Azerbaijan has among the lowest electricity and gas tariffs, but its companies spend relatively more on energy than their peers in the other survey countries. PRIORITIZATION AND UNDERSTANDING OF ENERGY EFFICIENCY POTENTIAL 15 2 Prioritization and Understanding of Energy Efficiency Potential This chapter uses the survey data to analyze how managers of industrial companies view energy efficiency, and whether the managers have a good understanding of energy con- sumption and energy efficiency potential. 2.1 Prioritization of Energy Efficiency Most survey respondents identified energy efficiency as one of the three main priorities Energy efficiency for their business. They cited cost competitiveness and energy reliability as reasons for measures are a priority prioritizing energy efficiency. for most companies surveyed … Figure 2.1 shows that nearly half of respondents in every survey country indicated energy efficiency to be one of the three main priority issues for their business. Figure 2.1: IS ENERGY EFFICIENCY IMPORTANT FOR YOUR BUSINESS? As Figure 2.1 shows, companies in Armenia were least likely to consider energy efficiency as a priority for their business: 32 percent of Armenian respondents indicated that energy efficiency measures were not a priority, compared to only a few percent of respondents in other countries. Fewer than half of Armenian respondents said energy efficiency was a priority issue for their business9. Companies in Georgia were most likely to consider energy efficiency a priority for their business, followed by companies in Belarus. In Georgia, high energy tariffs undoubtedly helped elevate the importance of energy efficiency. In Belarus, energy efficiency laws (including mandatory audits) were probably an important driver. Companies in sub-sectors with higher specific energy costs were more likely to prioritize energy efficiency. This was the case in Armenia, Belarus, and Ukraine, and was true for most sub-sectors in Azerbaijan and Georgia. Accordingly, companies in the chemical and building materials sub-sectors saw energy efficiency as a priority. Companies in the machine building sector did not see energy efficiency as a priority. 9 This survey preceded significant tariff hikes in Armenia in 2009. 16 PRIORITIZATION AND UNDERSTANDING OF ENERGY EFFICIENCY POTENTIAL Energy efficiency Respondents who said energy efficiency was a priority for their business were also asked helps reduce why. As shown in Figure 2.2, the main reasons were energy cost and the impact of costs and improve energy cost on the competitiveness of the business. Reliability of energy supply was also competitiveness an important reason. Figure 2.2: WHY IS ENERGY EFFICIENCY A PRIORITY FOR BUSINESS? 2.2 Managers’ Awareness of Energy Efficiency The survey showed that managers believed they had a good understanding of energy costs and energy efficiency potential. However, the survey also showed that managers typically underestimated potential energy savings by a wide margin. One reason for this is that managers do not have enough information—namely, detailed data on their companies’ energy use, and knowledge of those measures that would allow them to improve energy efficiency. 2.2.1 Management Understanding of Energy Consump- Managers believe tion and Costs they understand energy costs and Figure 2.3 and Figure 2.4 tabulate responses to two survey questions about managers’ opportunities to awareness of energy costs, and opportunities for improving energy efficiency. improve energy Management awareness of energy costs, and of opportunities to reduce those costs, is of efficiency course important to developing effective, targeted, energy efficiency programs. PRIORITIZATION AND UNDERSTANDING OF ENERGY EFFICIENCY POTENTIAL 17 Figure 2.3: HOW WELL DOES MANAGEMENT UNDERSTAND ENERGY COSTS? Figure 2.4: HOW WELL INFORMED ARE MANAGERS ABOUT OPPORTUNITIES TO IMPROVE ENERGY EFFICIENCY? As Figure 2.3 shows, most managers felt they had a good understanding of energy costs, and more than 90 percent felt they had at least an approximate understanding. Similarly, as Figure 2.4 shows, most respondents felt they were generally informed or well informed about opportunities for improving energy efficiency. However, as shown in sections 2.2.2 and 2.2.3, managers’ perceptions may not be in line with reality. 2.2.2 Management Assessment of Benefits Respondents almost always underestimated the potential benefits of energy investments in their companies. The survey asked respondents to indicate the percentage by which their company could reduce consumption of each type of energy while maintaining current production levels. Figure 2.5 compares the energy savings potential estimated by respondents to the energy savings potential if international best-practice technologies were used. 18 PRIORITIZATION AND UNDERSTANDING OF ENERGY EFFICIENCY POTENTIAL Figure 2.5: BY WHAT PERCENTAGE COULD YOUR COMPANY REDUCE ENERGY CONSUMPTION? It is evident that managers do not have a good understanding of potential savings from implementing energy efficiency measures. Managers in Azerbaijan, Belarus, Georgia, However, in reality, and Russia, gave the highest estimates of potential savings (and therefore, in this case, the mangers vastly most accurate), but underestimated potential by an average of 40 percent. In Armenia underestimate energy and Ukraine, underestimates were greater, with most managers underestimating savings savings potential potential by more than 65 percent. It is worth noting that Armenian respondents were also those most likely to rate their company management as being well informed about energy efficiency opportunities. Respondents in the survey countries are not alone in underestimating energy efficiency savings. The tendency to underestimate savings is common throughout emerging and developed economies. Company managers and their financiers often do not have sufficient experience with energy efficiency projects, or the companies in which they work may not have in place processes for assessing energy efficiency potential. More fundamentally, managers may simply not have the information they need to make decisions about energy costs and potential investment. Managers’ access to information in the survey countries is described below. 1.2.3 Management Access to Information Managers must have access to information if they are to understand energy use and opportunities for energy savings in their companies. Meters (electricity, gas, and Managers often do not sometimes heat) provide data on energy use. Energy audits typically provide information have access to the data necessary to make on opportunities for energy savings. good decisions about Roughly 40 percent of respondents claimed that management of their companies had energy efficiency exact energy cost data, and more than 70 percent had at least a good understanding of costs. However, a much smaller percentage of respondents reported having in place metering at various division levels within their company, or at the level of specific equipment. For example, 58 percent of Georgian respondents claimed to have exact data on energy costs, but less than 20 percent reported metering energy use at a division or equipment level. A similar contradiction can be seen in survey responses on energy audits. Most respondents said company managers were well informed about energy efficiency potential, and more than 90 percent claimed to be “informed of general facts”. However, a considerably smaller percentage had recently conducted energy audits (Figure 4.5, below). In Armenia, for example, 74 percent of respondents claimed to be well informed, but only 18 percent had carried out recent energy audits. In Azerbaijan, in contrast, only 40 PRIORITIZATION AND UNDERSTANDING OF ENERGY EFFICIENCY POTENTIAL 19 percent of respondents claimed to be well informed, while more than 50 percent had recently carried out an energy audit. The survey results on energy metering and audits are discussed in more detail in Chapter 4. 20 RECENT AND PLANNED INVESTMENTS IN ENERGY EFFICIENCY 3 Recent and Planned Investments in Energy Efficiency This chapter describes and analyzes survey respondents’ energy efficiency investments (during 2006–07), and the investments they planned to make during 2009–11. 3.1 Recent Investments in Energy Efficiency Most respondents have Investment in energy efficiency varied widely between the survey countries. Figure 3.1 implemented at least summarizes the survey results. In Belarus, 96 percent of companies implemented at least one energy efficiency one measure, and 78 percent implemented three or more measures. measure Figure 3.1: PROPORTION OF COMPANIES INVESTING IN ENERGY EFFICIENCY Investments in Investments in manufacturing upgrades were most common, followed by investments manufacturing in energy-efficient lighting. Roughly 40 percent of respondents in each country reported upgrades were most that they had invested in manufacturing upgrades or lighting. Also relatively common common, followed by were investments in energy metering systems, heat systems, compressors, and insulation. lighting Roughly one third of the respondents in each country reported that they had invested in one of these measures. Roughly 18 percent of respondents in each country reported that they had not made any investments in energy efficiency. Figure 3.2 shows the average of survey responses in each country, for different investment measures. RECENT AND PLANNED INVESTMENTS IN ENERGY EFFICIENCY 21 Figure 3.2: MOST COMMON ENERGY EFFICIENCY INVESTMENTS (AVERAGE PERCENTAGE IN EACH COUNTRY) Companies with older capital stock were more likely to have made investments in energy Companies with efficiency than companies with newer capital stock. older equipment were more likely to Companies in Belarus and Russia had the highest proportion of outdated equipment, invest manufacturing with 50 percent or more of respondents having refrigeration systems, boilers, heat upgrades exchangers, electric drives and motors, and ventilation systems more than 10 years old. Companies in Belarus also had the largest proportion of manufacturing equipment that Companies in Georgia was more than 10 years old (approximately 70 percent). These companies accordingly and Armenia invested were more likely to invest in upgrading manufacturing equipment (58 percent in Belarus less in metering and 45 percent in Russia). and manufacturing upgrades Companies in Belarus and Ukraine spent the most on energy efficiency investments. Investments in these countries also had longer payback periods than those in the other Companies in Belarus countries, reflecting expenditure in Belarus and Ukraine on more complex, higher-cost and Ukraine spent the manufacturing and energy equipment upgrades. Companies in the other survey countries most, and made spent less on energy efficiency, and invested in quicker payback manufacturing, metering, higher-cost, longer- and lighting projects. Companies in Georgia spent the least on energy efficiency, reflecting term investments the low proportion of upgrades that had been undertaken (11 percent had invested in metering, 35 percent in lighting, and 49 percent in manufacturing equipment). Figure 3.3 illustrates the survey results. The figure shows average expenditure by companies in each survey country on the three main measures implemented, and the average payback period for these investments. 22 RECENT AND PLANNED INVESTMENTS IN ENERGY EFFICIENCY Figure 3.3: INVESTMENT AMOUNTS (PER COMPANY, AVERAGE) AND PAYBACK PERIODS The trade-off between capital and operating As criteria for making their investments, the majority of respondents (more than 79 per- costs matters cent in each survey country) said they considered purchasing manufacturing and energy equipment with higher capital costs but lower operating costs (of which energy costs are a component). The survey results are shown in Figure 3.4. Figure 3.4: RESPONDENT DECISIONS ON HIGHER CAPITAL COST/LOWER OPERATING COST EQUIPMENT Companies in Azerbaijan and Russia were the least likely to consider the trade-offs be- tween capital expenditure and operating expenditure, and most likely to purchase low capital cost/high operating cost equipment. This trend may indicate a lack of under- standing of the options, or a lack of funds to pay for more than the minimum cost of equipment. 3.2 Planned Investments in Energy Efficiency Planned increases in energy efficiency Figure 3.5 compares survey respondents’ actual investment in energy efficiency investment are investment planned for the period 2009–11. These figures are based on investment substantial plans put forward by companies prior to the impacts of the global financial crisis of 2008–2009: the current appetite for energy efficiency investments may have changed. RECENT AND PLANNED INVESTMENTS IN ENERGY EFFICIENCY 23 Figure 3.5: HISTORICAL AND PLANNED INVESTMENT IN ENERGY EFFICIENCY10 (In USD, millions) The average value of Figure 3.6 shows how much respondents planned to invest in energy efficiency during planned investments is small 2009–2011. Most survey respondents planned to invest relatively small amounts (less than $50,000). Only a small proportion of respondents planned to spend more than $500,000 over the period: 13 percent in Armenia and Russia, 15 percent in Ukraine, and 24 percent in both Azerbaijan and Georgia. Figure 3.6: HOW MUCH DO COMPANIES PLAN TO INVEST IN ENERGY EFFICIENCY ? In Belarus, in contrast, 44 percent of respondents indicated that they planned to spend more than $500,000. Roughly 30 percent of Belarusian companies plan to spend more than $1 million and 89 percent plan to spend more than $50,000. The aggressive investment plans in Belarus are across all equipment types, with increases (relative to 2006–2007) ranging from five-fold (the food and chemical processing sectors) to 11-fold (the building materials sector). 10 This figure refers to total actual and planned expenditure by the companies surveyed. It should be noted that a larger number of companies in Russia and Ukraine were surveyed (625 and 325, respectively). 24 INCENTIVIZING, PLANNING, AND EVALUATING ENERGY EFFICIENCY INVESTMENTS 4 Incentivizing, Planning, and Evaluating Energy Efficiency Investments This chapter describes how energy efficiency investments are incentivized, planned, and monitored. It describes and analyzes, more specifically: • the measures that governments and company management use to try to improve energy efficiency in the survey countries; • how companies plan for energy efficiency investments; and • the use by companies of energy audits and energy metering to determine which energy efficiency investments to make. 4.1 Government Incentives and Requirements All but one of the A range of instruments are available to policy makers wanting to improve energy survey countries have efficiency in industry. These instruments are usually administrative or financial, and passed laws related to are set out in laws or decrees made by national, and sometimes regional and local, energy efficiency government agencies. With the exception of Georgia, all of the countries in the survey have passed national legislation related to energy efficiency. Most also have a national policy outlining a plan or strategy for achieving the country’s energy efficiency potential. Table 4.1 lists the names of these laws and policies for each survey country, and the year in which they entered into force. Table 4.1: LEGAL AND POLICY FRAMEWORK FOR ENERGY EFFICIENCY IN THE SURVEY COUNTRIES INCENTIVIZING, PLANNING, AND EVALUATING ENERGY EFFICIENCY INVESTMENTS 25 However, many respondents felt the existing legal frameworks failed to promote energy But respondents efficiency at the time of the survey. At the time of the survey in 2006, respondents in feel that laws are Russia showed the lowest level of support, with only 19 percent saying that current laws ineffective encourage energy efficiency (the current situation has improved significantly, with the enactment of the new Law on Energy Saving and Improving Energy Efficiency and high federal priority given to increasing the energy efficiency of the economy). In Belarus, in contrast, 50 percent of respondents said that current laws encourage energy efficiency. In many of the survey countries, the regulations that implement the energy efficiency laws are often absent or ineffective. For example, the government of Armenia has passed voluntary energy efficiency standards, but the voluntary standards do little to incentivize energy efficiency. In Ukraine, caps on energy use in industry have proven ineffective because the fines for noncompliance are too low. In Azerbaijan, the government has yet to pass any secondary legislation or regulation necessary to implement energy efficiency measures. This may explain why roughly half of respondents in Azerbaijan indicated that they felt the legal framework promoted energy efficiency, but few could identify specific Respondents prefer tax policy-level energy efficiency initiatives from which they could benefit. incentives and direct government funding Respondents were also asked to rank the mechanisms that would most stimulate their for energy efficiency company to improve its energy efficiency. Most respondents favored tax credits or other tax incentives, and direct public funding of energy efficiency projects. Figure 4.2 shows the survey results for the most preferred measures. Public funding for energy efficiency projects was strongly preferred in Belarus, probably because of the large number of state-owned enterprises in that country. (Few respondents thought governments guarantees for loans were good for incentivizing energy efficiency). This is surprising given that many companies cite difficulties in obtaining external finance as a barrier to investing in energy efficiency (see Chapter 5). Figure 4.2: WHICH GOVERNMENT MECHANISMS COULD IMPROVE ENERGY EFFICIENCY IN THE SURVEY COUNTRIES (TOP TWO MEASURES)? 4.2 Management Incentives and Requirements The survey found that some companies in all of the survey countries provided incentives for employees to save energy (or disincentives against wasting energy), but also found that the practice was not commonplace. Companies in Belarus stand out as the most active, more than one third of respondents provide incentives or disincentives to save energy. Figure 4.3 summarizes the suvey results. The most common measures included: 26 INCENTIVIZING, PLANNING, AND EVALUATING ENERGY EFFICIENCY INVESTMENTS • rewarding staff financially for savings energy (or conversely, applying penalties for wasting energy); • using non-financial measures, for example, informing employees about energy efficiency opportunities; and • making an employee or unit of the company responsible for improving energy efficiency. Figure 4.3: HOW DO YOU REWARD ENERGY SAVINGS? 4.3 Energy Efficiency Plans The extent to which energy efficiency plans are aligned with business strategy and integrated into broader business planning varies considerably. Figure 4.4 shows the extent to which survey respondents have energy efficiency plans in place, and have implemented energy efficiency measures that they planned. Figure 4.4: DO YOU HAVE PLANS AND HAVE YOU IMPLEMENTED ENERGY EFFICIENCY MEASURES? Planning for energy efficiency has become widely accepted in Belarus In Belarus, planning for energy efficiency is more widely accepted as an integral part of business strategy than in other survey countries. Approximately 80 percent of companies INCENTIVIZING, PLANNING, AND EVALUATING ENERGY EFFICIENCY INVESTMENTS 27 in Belarus have developed and implemented energy efficiency plans. This is driven primarily by: • the need to increase competitiveness, which has resulted in companies placing greater emphasis on managing costs such as energy costs; and • the active role played by government in promoting industrial energy efficiency. Far fewer companies in the other survey countries have integrated energy efficiency There is less planning planning into their business strategies. Only 29 percent of companies in Armenia, and in other countries, but only 24 percent of companies in Azerbaijan and Georgia, reported having developed and some implementation executed an energy efficiency plan. This is not to say that companies in these countries nevertheless are not carrying out energy efficiency measures. As shown in Chapter 3, companies in all survey countries are investing in energy efficiency, in spite of not having an energy plan. The survey found that larger companies were more likely than smaller companies to have Larger companies are developed and executed energy efficiency plans11. However, in Belarus and Ukraine— more likely to develop where energy efficiency plans are most common—small companies were only slightly less and execute plans … likely than the largest companies to have a plan. In contrast, the difference was greater in the other countries; for example, in Georgia only six percent of small businesses had had an energy efficiency plan, in comparison with 43 percent of large businesses. While smaller companies were less likely to have developed and implemented a formal … but smaller energy efficiency plan, the survey showed that they were likely to use organizational companies often measures to improve energy efficiency. The most common approaches included financial adopt organizational incentives (rewarding or penalizing staff for energy savings or wastage, respectively), measures informing employees about energy efficiency measures, and making a specific employee or unit responsible for energy efficiency. 4.4 Energy Audits Energy audits are most common in Azerbaijan and Belarus. Both countries have Audits were most mandatory audit requirements applicable to companies with energy consumption above common in Azerbaijan a specified level12. Other countries also have some level of mandatory requirement in and Belarus place. Figure 4.5 shows the percentage of respondents who had implemented voluntary or mandatory audits in each survey country. Figure 4.5: DID YOU CONDUCT ENERGY AUDITS? 11 The survey classified companies as large (defined as those with turnover in excess of $25 million), medium– large ($5–25 million), medium ($1–5 million) and small (turnover of less than $1 million). 12 The Law on the Use of Energy Resources (Azerbaijan) requires enterprises whose annual energy consump- tion exceeds 8,140 MWh (the equivalent of 1,000 tons of coal) to conduct energy audits. The Belarusian Law on Energy Saving requires that companies with total energy consumption above 1,500 tons of coal equivalent (tce) per year (about 12,211 MWh) carry out an energy audit. The “tons of coal equivalent” is the energy unit widely used across the region of the former Soviet Union. 28 INCENTIVIZING, PLANNING, AND EVALUATING ENERGY EFFICIENCY INVESTMENTS Companies that had Generally, companies were more likely to have carried out energy equipment upgrades, carried out audits were and invest in energy metering, if they had conducted an audit. However, companies more likely to invest in were likely to invest in efficient lighting or building insulation whether they had an energy efficiency audit or not, possibly because the lower complexity and well-documented benefits of these measures meant the decision did not rely on audit findings. Similarly, investments in manufacturing upgrades depended more on production requirements than on the results of an energy audit. 4.5 Energy Metering Figure 4.6 shows how respondents measure energy consumption. All respondents had company-wide metering in place, but fewer than 20 percent had metering at the division or equipment level. Figure 4.6: HOW DOES YOUR COMPANY TRACK ENERGY CONSUMPTION? Figure 4.6 also shows the percentage of firms that had upgraded their metering systems during the period of 2006–07. While it might be expected that metering upgrades would be more prevalent in countries such as Armenia, Azerbaijan, and Georgia, where Companies in Belarus and Ukrain were more likely to have metering at the division and equipment levels the quality of metering stock is lowest, this is not the case. Metering upgrades were more common in countries that already have the “best” equipment (in other words, meters which provide information at the finest level of detail)—namely, Belarus, Russia, and Ukraine. This suggests that managers who already use more advanced metering understand its benefits in controlling energy costs. Survey respondents in countries with the “best” metering systems, and those had made the most upgrades, were also more likely to have developed and executed energy plans. This finding suggests that the objective information provided by metering systems is useful in supporting the development of energy efficiency plans. Higher turnover The sophistication of metering equipment also varied according to the size of the companies monitor company. Companies with higher turnover generally had metering systems that energy consumption at monitored consumption at the most detailed levels. a more detailed level A sizeable proportion of small- and medium-sized companies also monitor energy consumption at a detailed level. For example, in Ukraine nearly 40 percent of companies using automated metering systems were found to be small- or medium-sized companies. This shows that improved metering is not necessarily cost-prohibitive for smaller companies. PROJECT FINANCING OF ENERGY EFFICIENCY 29 5 Project Financing of Energy Efficiency This chapter describes and analyzes survey data relating to how companies pay for energy efficiency investments. Section 5.1 assesses the importance of financial barriers in preventing companies from investing in energy efficiency. Section 5.2 describes how survey respondents financed their energy efficiency investments. Section 5.3 concludes by describing the survey results on loan tenors and payback periods. 5.1 Financial Barriers to Energy Efficiency Asked what difficulties they had experienced in implementing energy efficiency projects, Financial barriers respondents primarily cited financial and organizational barriers. Figure 5.1 shows the prevent investment in barriers identified by respondents in each country. These barriers appear to be relatively energy efficiency common across the countries. Figure 5.1: WHAT BARRIERS PREVENT YOU FROM INVESTING IN ENERGY EFFICIENCY? The most significant barrier cited in every country was financial. More than half of Companies say they all respondents said that a lack of internal funds was a barrier to investment in energy lack sufficient internal efficiency. Roughly 20 percent of respondents indicated that they had difficulty attracting funds or cannot secure outside financing external funding for projects. However, only a small proportion of respondents had applied for external financing. 30 PROJECT FINANCING OF ENERGY EFFICIENCY This finding suggests that, despite an improving availability of external financing, self- funding is preferred. The fact that external financing can release internal funds for more productive uses does not appear to be well understood. Survey respondents also cited organizational barriers. Organizational barriers included problems evaluating projects, lack of experience in developing projects, and the necessity to obtain a permit or consents from the government. Technical problems during implementation were also cited as barriers. Roughly 20 percent of respondents stated that organizational or technical barriers prevented them from investing in energy efficiency. 5.2 Financing of Energy Efficiency Measures Company managers were also asked why they had not applied for external financing Few respondents sought external for recent projects. Figure 5.2. shoes the survey results. One of the two key reasons financing … given was that companies had sufficient internal funds; yet more than 40 percent of respondents, on the question of project difficulties (Section 5.1) had cited “lack of own free funds”. Figure 5.2: WHY DID YOU NOT APPLY FOR EXTERNAL FUNDING? Twenty percent of respondents indicated that they had difficulty attracting external financing for energy efficiency investments. However, the survey also found that respondents (in all of the survey countries) were generally reluctant to seek external financing for energy efficiency projects. Only 15–35 percent of respondents actually sought financing13. … but many who Of the respondents who sought financing, many received it. Figure 5.3. summarizes the sought it, received it success rates for obtaining loans in each of the survey countries. Respondents in countries where a lack of external financing was the principal barrier (Belarus 38 percent, Georgia 22 percent, Russia 18 percent), were also more likely to have applied for financing (35 percent, 27 percent, and 24 percent, respectively), and more likely to have been successful in obtaining it (86 percent, 82 percent, and 89 percent, respectively). 13 Seventeen percent of companies in Armenia, 15 percent of companies in Azerbaijan, 27 percent companies in Georgia, 15 percent companies in Ukrain, and 35 percent companies in Belarus. PROJECT FINANCING OF ENERGY EFFICIENCY 31 Figure 5.3: WERE YOU SUCCESSFUL IN OBTAINING EXTERNAL FINANCING? The reasons for the contradiction cannot be determined from the survey data. However, it is possible that respondents who sought external financing had a greater appreciation of the difficulties of doing so, and had therefore become better at preparing successful applications. In terms of the unsuccessful applications, the most common reason given was “high interest rates”. Other reasons included administrative problems, such as incomplete loan documentation, applicants’ inability to provide loan guarantees, or short maturity periods14. 5.3 Payback Periods and Loan Tenors for Energy Efficiency Measures The survey suggests that investors and banks are becoming more familiar with energy efficiency investments because of companies’ expected payback periods and the durations of loan facilities offered by banks, are increasing. Figure 5.4 shows the tenor of recent loans taken out by the companies in the survey compared with the payback periods that companies considered to be acceptable (in Payback periods and months), by country. Payback periods for investments carried out over the 2006–07 loan tenors are getting period are also shown. longer Figure 5.4: PAYBACK PERIODS AND LOAN TENORS FOR ENERGY EFFICIENCY PROJECTS 14 These reasons were provided for unsuccessful applications in Armenia, Azerbaijan and Ukraine. No rea- sons were given in the cases of Belarus and Georgia. 32 PROJECT FINANCING OF ENERGY EFFICIENCY Expected payback periods for future investments were longer than the expected payback periods in previous years. This finding suggests that companies are becoming more comfortable with undertaking longer-term investments in energy efficiency. The survey asked whether companies had used analysis of payback periods to inform investment decisions. Analysis of payback periods is often, but not routinely, used in project evaluation. In most countries, fewer than 50 percent of companies said they always considered payback periods. The outliers were Belarus (where 69 percent reported always having considered payback periods), and Azerbaijan (where only 34 percent reported always having done so). A surprising proportion claimed to have never used this sort of analysis (nine percent in Belarus, up to 35 percent in Armenia, and up to 46 percent in Azerbaijan, respectively). While projects with the shortest payback periods are not always implemented first, it is reasonable to assume that, as more and more investments are made, average payback periods will increase as it becomes harder to find projects withshort payback periods. The survey data support this hypothesis: as shown in Figure 5.4, payback periods for projects implemental in 2006-07 were shorter than payback periods for projects planned for 2009–11. Available loan tenors Figure 5.4 also shows that loan tenors generally consistent with the payback periods of and expected payback planned investments. Georgia is the exception, where loan tenors significantly exceed periods are consistent those required for the planned investments. In Armenia, Azerbaijan and Belarus, companies can obtain three year or longer loans for energy efficiency projects. Average payback periods in Belarus, both actual and forecast, were somewhat longer than those in the other countries. Companies were willing to invest in energy efficiency projects with payback periods as long as three years. However, while the tenors of existing bank loans and leasing contracts were found to be almost 44 months (for projects carried out by survey respondents), this is likely to be at the long end of what lenders are willing to risk. CONCLUSIONS AND RECOMMENDATIONS 33 6 Conclusions and Recommendations The survey shows evidence of promising trends for improving energy efficiency in the survey countries, but also evidence of enduring challenges. This chapter first summarizes, in Section 6.1, the most important findings, and concludes in Section 6.2 with recommendations on how industry, governments, and financiers can use the survey information to improve energy efficiency. 6.1 Summary of Key Survey Findings All of the survey countries have experienced steady economic growth, and this has produced reductions in energy intensity as a result of the increased use of existing production equipment and facilities. The other significant driver of reduced energy intensity has been energy efficiency investment, with the primary driver for this being government policy. Energy intensity remains high in Azerbaijan, Belarus, Georgia, Russia, and Ukraine. Only Armenia has reduced energy intensity to a level that is even close to comparable with that of its European competitors, but this is primarily due to increased export activity, the expansion of the construction and service sectors, and the fact that Armenia has little heavy industry. Therefore, there is still substantial room for improving energy efficiency and, with it, the competitiveness of industry in external markets. The survey shows broad acceptance of the idea that energy efficiency measures can provide substantial benefits in terms of competitiveness. However, the rate at which energy efficiency measures are being implemented varies significantly by country and industrial sub-sector. 6.1.1 The Importance of Government Action The extent to which energy efficiency is prioritized by government is a key driver of energy efficiency gains. Governments have put varying levels of priority on energy efficiency: companies in countries (such as Belarus) whose governments place a strong emphasis on energy efficiency have made substantially greater investments in energy efficiency than companies in the other survey countries. At one end of the spectrum, Georgia has no policy frameworks for energy efficiency. This lack of policy support was reflected in the survey, with 70 percent of respondents indicating that they considered current regulatory instruments to be ineffective. Significant support will be needed from government to achieve better energy efficiency outcomes. The governments of Armenia, Azerbaijan, and Ukraine have instituted legal frameworks prioritizing energy efficiency, but the majority of company managers in these countries indicated that they did not think the laws promoted industrial energy efficiency. Supporting practical instruments to promote energy efficiency are needed. In the case of Belarus, a major reason for the gains in energy efficiency in recent years has been the government’s role in designing and enforcing a comprehensive policy on energy efficiency. Half of all respondents said the legal framework facilitate energy efficiency gains. In some countries, existing laws discouraged, rather than encouraged energy efficiency. In Azerbaijan and Belarus, for example, cumbersome and time-consuming procedures to obtain permits and licenses were seen by many respondents as barriers to the implementation of energy efficiency projects. 34 CONCLUSIONS AND RECOMMENDATIONS 6.1.2 Industry Understanding and Prioritization of Energy Efficiency Until managers have a good understanding of energy costs, and a knowledge of energy efficiency measures and potential savings that might be achieved, planning for and implementation of energy efficiency measures will remain sub-optimal. Increasing the awareness and knowledge of company managers regarding available measures and technologies, and of the need to plan for energy efficiency, is therefore important. Gathering Information In Azerbaijan, Armenia, Georgia, and Russia, energy efficiency measures applied to date have primarily been low-cost, low-complexity, and self-funded—a focus on improving information and knowledge around the potential of more complex measures, and of the benefits of external financing, would be very useful in these instances. In Armenia and Ukraine, in particular, managers vastly underestimated energy efficiency potential, suggesting that management awareness of best-practice technologies is inadequate. However, underestimation of potential was found to be common in all survey countries, particularly for more complex measures and within smaller companies. More widespread investment in metering upgrades and in conducting energy audits is needed to help managers understand the value of investments. Currently, the metering stock in most of the survey countries is relatively poor. With the exception of Belarus and Ukraine, few companies have metering in place at a level of granularity finer than company-wide, although, in recent years, investment in metering upgrades has been very common in some countries: 40–50 percent of respondents in Belarus, Russia, and Ukraine have invested in recent metering years, but only eight percent and 11 percent in Armenia and Georgia, respectively. Similarly, few companies use energy audits to inform energy efficiency plans. However, mandatory audit requirements for large companies in Azerbaijan and Belarus have resulted in a significantly greater proportion of companies conducting audits (about 50 percent, compared to 18–35 percent in the other survey countries). Because the survey also showed that those companies that carry out audits tend to invest in more complex energy efficiency measures (such as energy equipment upgrades) and more in energy efficiency in general, this is an important action area. Business Planning for Energy Efficiency Formalized planning for energy efficiency investment within the broader development planning of a company utilizes the information provided by audits and energy metering. While the extent to which formal energy plans had been prepared varied widely between countries, the study showed that larger companies were more likely than smaller companies to have a formal energy efficiency plan in place. It also showed that, across the board, companies with energy efficiency action plans have implemented more energy efficiency projects (and with larger investments) than those without such arrangements in place. In addition to having a formal energy efficiency plan, the survey found that many companies do implement alternative, organizational measures to improve energy efficiency. Examples include: motivating staff through financial incentives for prudent energy use, having an individual or unit responsible for energy efficiency, and informing staff about the importance of energy efficiency and how it might be achieved. Belarusian and Ukrainian companies were found to be most likely to have such measures in place, and Armenian and Georgian companies the least likely. The most common measure, namely, making an individual responsible for energy efficiency, was found to have been implemented in 75 percent of Belarusian and 51 percent of Russian companies. CONCLUSIONS AND RECOMMENDATIONS 35 6.1.3 Investment The key finding of this study related to investment in energy efficiency measures is that industrial enterprises across all countries operated a lot of energy-intensive equipment that has outlived its economic usefulness. This increases operating costs, because the equipment is less efficient, and because old equipment breaks down more often. Investment in no-cost measures (for example, administrative initiatives) and low-cost measures (for example, efficient lighting) has been substantial in recent years. Investments in energy efficient lighting were the most common or second most common energy efficiency investment in every survey country (in terms of percentage of respondents), with at least one quarter of companies in the survey implementing such measures over the 2006–07 period. Investment in the upgrading of metering has also been substantial in some countries. Interestingly, the greatest investment has occurred in those countries—Belarus and Ukraine—that already have the best metering “fleet” (in other words, metering facilities delivering the finest granularity). However, the area in which the most substantial gains can be made is in the replacement of outdated manufacturing and energy equipment. The preponderance of outdated equipment is substantial across all countries, with the most outdated equipment being in use by companies in Belarus, Georgia and Russia. More than 20 percent of manufacturing equipment in the first two of these countries is more than 25 years old, and more than 40 percent is older than 10 years. In Russia, more than 50 percent of energy equipment is older than 10 years. Across the board, the food processing sector is the least likely to have retained outdated energy and manufacturing equipment, reflecting the particularly competitive nature of that industry. Even in Belarus, only 23 percent of food processing businesses have equipment older than 15 years; in Georgia this figure is only six percent. In terms of the level of investment that has occurred in recent years, more than one third of respondents, across all countries, have undertaken manufacturing upgrades over the 2006–07 period, and substantial numbers have invested in various energy equipment upgrades, particularly in upgrading heating systems, in compressors, and in building insulation. In most cases, a decision to select higher capital/lower operating cost options was made. Planned expenditure over the next few years showed significant increases over 2006–07 levels: companies in Armenia, Azerbaijan, and Georgia plan, collectively, to increase expenditure on energy-efficient equipment by 400–600 percent over 2006–07 levels. Planned expenditure increases by companies in Belarus and Ukraine, of about one third (and by Russian companies, of 20 percent) appear modest in comparison. However, these countries have started from a substantially higher base, having spent $60 and $95 million, respectively, in 2006–07, compared to only $5 million, $6.8 million, and 10.9 million in Armenia, Azerbaijan, and Georgia, respectively. Russian companies spent about $120 million15. 6.1.4 Financing Energy Efficiency The approach to financing energy efficiency projects was found to be common across all of the countries in the study. The majority of surveyed companies displayed reluctance to seek external funding, and preferred instead to use their own funds to invest in energy efficiency. This reluctance to borrow means that many profitable energy-efficient measures are being postponed or abandoned even though, in the longer term, the savings they generate would outweigh the costs of borrowing. While more than 40 percent of respondents claimed that lack of own free funds was a barrier to investing in energy efficiency, only a small percentage of companies (ranging 15 It is worth noting, however, that the survey included 325 companies in Ukraine and 625 in Russia. 36 CONCLUSIONS AND RECOMMENDATIONS from 15 percent in Azerbaijan to 35 percent in Belarus) had applied for external financing. In Belarus, Georgia, Russia, and Ukraine, success rates for those that had applied for funding exceeded 80 percent, and loan maturities were generally in line with payback periods for the proposed investments. 6.2 Recommendations to the Main Actors in Energy Efficiency in the Six Countries Involved Implementation of energy efficiency measures will benefit the survey countries in the longer term, increasing their competitiveness and helping them to combat the current financial and economic crisis. This section looks at the actions that could usefully be taken by industry, financiers and government to achieve greater gains in energy efficiency. 6.2.1 Industry Actions that need to be taken by industry can be split into three broad categories: awareness-raising and administrative measures; technical measures; and financial measures. Awareness-raising and administrative measures include the following. • Awareness: increase the awareness of company managers and staff concerning the benefits of energy efficiency in terms of energy and costs. • Administrative measures: where this is not already done, apply tools such as bonuses to reward initiatives by staff to reduce energy consumption, and appoint a staff member or create a unit within the company to be responsible for monitoring energy efficiency. • Planning: ensure that the company has an energy efficiency action plan that is aligned with company development plans. • Obtaining quality information: use energy audits as a means to understand current energy consumption patterns; consider how to most cost-effectively invest in energy efficiency and optimize energy usage; prioritize investment; and provide useful information for energy efficiency planning and loan applications. • Education: companies need to know how to set up energy cost centers, which can be achieved by monitoring the energy consumption of specific industrial processes and of the most energy-intensive equipment. Company staff also need to have skills in project evaluation, develop strong linkages between technical and financial staff for the purposes of planning and seeking external funding, and understand the benefits of external funding. Technical measures include the following. • Investing in quality information capability: where economically feasible, upgrade metering equipment to enable monitoring of energy consumption by production unit and energy-intensive equipment. • Benchmarking: undertake assessments of technically feasible and cost-effective energy savings by benchmarking with companies from the same sector within the country, and with companies in other countries. Financial measures include the following. • Analysis of individual energy efficiency opportunities: apply rigorous analysis to potential projects—this will not only help integrate energy efficiency into company development strategies and investment decision-making processes, but will also provide rigorous analysis to support applications for external financing. • Consider external funding: using a company’s own capital as its only source for energy efficiency investments limits and delays potential savings. CONCLUSIONS AND RECOMMENDATIONS 37 6.2.2 Governmental Authorities As seen in Belarus, government policies can be instrumental in improving the energy efficiency of national economies. There is a range of instruments available to policy makers seeking to reduce energy consumption, including administrative or financial measures. With the exception of Georgia, the six countries in the survey have in place legislation related to energy efficiency. However, in several cases the secondary legislation required to implement such laws remains incomplete, reducing the gains that might be achieved through its adoption. In the case of Georgia, specifically, the top priority for government authorities should be to develop and implement a legal framework for energy efficiency. As noted above, the survey found that 70 percent of Georgian respondents considered that the legislative framework did not promote energy efficiency. The survey also showed that Georgian companies lagged behind most of the other survey countries in terms of planning for energy efficiency, conducting energy audits, and investing in energy efficiency initiatives (including metering), and that Georgia had one of the oldest manufacturing equipment “fleets”. In addition, the Georgian economy’s energy intensity (in other words, the amount of energy consumed per unit of GDP) is higher than in comparable economies. This is despite the fact that Georgian companies face among the highest gas and electricity tariffs. When compared with the success seen in Belarus, in particular, there is a strong case for a legal framework that will help improve energy efficiency. In the case of all of the survey countries, governments must ensure that the existing legal framework for energy efficiency is effective—in other words, that measures are designed, funded, and appropriately enforced to achieve the necessary objectives. Currently, mechanisms tend, in many cases, to rely on mandatory requirements—for example, inspections or energy audits. A number of more incentive-based mechanisms might be considered in addition to these, such as tax benefits for energy efficiency investments. In several countries (Belarus and Azerbaijan, in particular), cumbersome and time- consuming procedures to obtain permits and licenses were seen by a significant proportion of respondents as constituting a barrier to the implementation of energy efficiency projects. Governments can assist in this area by working with the industrial sector in reducing these barriers. 6.2.3 Financiers Energy efficiency financing can become a unique and attractive product offered by financial institutions. There is a growing need for external financing for energy efficiency in all of the survey countries, particularly given the significant increase in planned expenditure by firms over the next few years, and the full economic potential beyond that time. Useful initiatives by lending institutions might include the following. • Education: improving company managers’ understanding of the impact of energy efficiency measures on their company’s financial standing, and the benefits of utilizing external financing. • Product development: fostering the creation of relevant financial products and services. • Assistance with applications: creating clarity around application requirements, streamlining processes, and so on. • Project support: lending institutions could appoint a designated expert in energy efficiency financing to assist companies with the design and evaluation of energy efficiency projects. This approach is potentially advantageous to financial institutions, as it can lead to increased lending for projects with known benefits, and reduced time spent on assessing and working with companies on unsuccessful applications. 38 Appendix A: Survey Methodology Data from two surveys contribute to this report. A survey was undertaken in Russia in 2006, with a second survey undertaken for the other five survey countries in 2008. The latter was based on, but was not identical to, the former survey. The objective of both surveys was to show how industrial enterprises in each of the survey countries evaluate, plan, finance, and implement energy efficiency improvements. Survey characteristics are outlined below in respect of the five-country survey, with differences from the Russian survey noted. Characteristics of the survey include the following: Industry sectors covered. The companies surveyed represent five industrial sectors that are generally highly energy-intensive and have significant potential for energy savings. These sectors are: • the food processing industry; • the chemical and petrochemical industry; • the building materials industry; • the metal processing industry; and • the machine building industry. Survey respondents were intended to represent the predominant industrial sectors of the survey countries. In the case of Russia, the industries surveyed were wood processing, light industry, metal processing, machine building, the meat and dairy industry, and the bread and confectionary industry. Countries and regions covered. The survey was carried out among enterprises in Armenia, Azerbaijan, Belarus, Georgia, and Ukraine, during the summer of 2007. The Russian survey was carried out during the summer of 2006, and as such, the “current” investments and “future” investment plans relating to companies in this country differ from those of the other countries. Companies were selected from a number of regions across each country. Sampling method and sample size. The survey was conducted using a detailed questionnaire, and through face-to-face interviews with the management of at least 100 companies in each of the survey countries. The sample of respondents was developed on the basis of the incidence and distribution of medium to medium–large manufacturing enterprises representative of the respective industry sectors throughout the country in question. The sample distribution (in terms of the number of companies) was as follows: Armenia—100, Azerbaijan—100, Belarus—125, Georgia—100, Ukraine—325, and Russia—625, giving a total sample of 1350 companies. Probability proportional to size sampling was carried out in all six survey countries so that the five industrial sectors of industry were proportionally represented in the actual industry composition.