103125 Belarus: Scaling Up Energy Efficiency Retrofit of Residential and Public Buildings Assessment of Investment Needs, Implementation Constraints, Financing Options and Delivery Models December 2015 Energy and Extractives Global Practice Europe and Central Asia Region The World Bank Standard Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Table of Contents List of Abbreviations i Acknowledgements iii Executive Summary iv 1 Introduction 1 2 Enabling Environment for EE in Buildings 4 3 Scale Up Thermal Retrofit of Residential Buildings 11 3.1 Characteristics of the Residential Building Stock 11 3.2 Costs and Benefits of Thermal Retrofit 17 3.3 Barriers to Scaling Up Thermal Retrofit 26 3.4 Options for Financing and Delivery 28 3.5 A Roadmap for Scaling Up Thermal Retrofit of Residential Buildings 36 4 Financing and Delivery of EE in Public Buildings 42 4.1 Characteristics of the Public Building Stock 42 4.2 Costs and Benefits of EE Improvements 49 4.3 Barriers to EE in Public Buildings 56 4.4 Options for Financing and Delivery 58 4.5 A Roadmap for Developing Sustainable Financing for Public Buildings 68 5 Conclusion 71 Appendices Appendix A : Possible Windows of EERFs 75 Appendix B : Management of EERFs 76 Appendix C : Case Studies of Completed Thermal Retrofit Projects 77 Appendix D : Possible Investment Mechanisms in the Residential Sector 84 Appendix E : Possible Investment Mechanisms in the Public Sector 85 Appendix F : Calculating Potential of ESM Packages for Residential Buildings 89 Appendix G : Regional Experience Implementing Apartment Level Consumption-Based Billing (Croatia) 96 Appendix H : Summary of Survey Results 97 Appendix I : Summary of In-depth Interview Results 103 Appendix J : Calculating the Potential of ESM Packages for Public Buildings 105 Appendix K : Estimated Fiscal Cost and Effectiveness of Expanding Social Protection Mechanisms in Belarus 111 Appendix L : Heat Consumption of Housing Stock by Standard Series of Residential Buildings 112 Appendix Tables Appendix Table C.1: Selected Residential Buildings Receiving Thermal Retrofits 77 Appendix Table C.2: Selected Public Buildings Receiving Thermal Retrofits 81 Appendix Table F.1: Baseline and Adjusted Baseline Consumption in pre-1996 Residential Buildings 89 Appendix Table F.2: Total Annual Consumption in pre-1996 Residential Buildings 90 Appendix Table F.3: Relative Energy Savings from Implementation of ESMs 90 Appendix Table F.4: Applicability of ESMs 91 Appendix Table F.5: Potential Annual Energy Savings of Individual ESMs 91 Appendix Table F.6: Potential Annual Energy Savings of ESM Packages 92 Appendix Table F.7: Cost of Implementing ESMs 92 Appendix Table F.8: Number of Heaters and Area of Walls, Roofs and Windows by Building Type 92 Appendix Table F.9: CAPEX for Individual ESMs by Building Type 93 Appendix Table F.10: CAPEX for ESM Packages by Building Type 93 Appendix Table F.11: Key Assumptions for Supply Curve Analysis 94 Appendix Table F.12: Levelized Cost for Each Package by Building Type 94 Appendix Table F.13: Cumulative Annual Savings for Each Package 95 Appendix Table F.14: Calculations for Deep Renovation with Low-Cost Financing and Capital Subsidy 95 Appendix Table H.1: Perceived Indoor Temperature in Buildings with and without Thermal Retrofits 97 Appendix Table H.2: Coping Strategies against Increases in Heat Tariffs 98 Appendix Table H.3: Summary of Sample Demographics 100 Appendix Table H.4: Characteristics of Buildings Surveyed 101 Appendix Table H.5: Primary Material of Building 102 Appendix Table H.6: Building Type by Number of Floors 102 Appendix Table J.1: Baseline and Adjusted Baseline Consumption in Public Buildings 105 Appendix Table J.2: Total Annual Consumption in Public Buildings 105 Appendix Table J.3: Relative Energy Savings from Implementation of ESMs, Public 106 Appendix Table J.4: Potential Annual Energy Savings of Individual ESMs, Public 106 Appendix Table J.5: Potential Annual Energy Savings of ESM Packages, Public 107 Appendix Table J.6: Number of Heaters and Area of Walls, Roofs and Windows by Public Building Type 107 Appendix Table J.7: CAPEX for Individual ESMs by Public Building Type 108 Appendix Table J.8: CAPEX for ESM Packages by Public Building Type 108 Appendix Table J.9: Key Assumptions for Supply Curves in Public Buildings 109 Appendix Table J.10: Levelized Cost for Each Package by Public Building Type 109 Appendix Table J.11: Cumulative Annual Savings for Each Package, Public 110 Appendix Table J.12: Calculations for Deep Renovation in Public Buildings with Low-Cost Financing and Capital Subsidy 110 Appendix Table K.1: Benefit Coverage, Targeting Accuracy and Fiscal Cost of GASP and H&U Benefits 111 Appendix Figures Appendix Figure H.1: Willingness to Pay for Thermal Renovations 99 Tables Table 3.1: Summary of Savings Potential and Investment Costs, by Package and Building Type 21 Table 3.2: Key Assumptions for Supply Curve Analysis 22 Table 3.3: Summary of Possible EE Financing Mechanisms in the Residential Sector 29 Table 3.4: Solutions to the Main Barriers to Residential Thermal Retrofit 37 Table 4.1: Estimates of Secondary Schools and Kindergartens Built before 1996 46 Table 4.2: Estimated Heated Area of Administrative Buildings 49 Table 4.3: Summary of Savings Potential and Investment Costs, by Package and Public Building Type 51 Table 4.4: Key Assumptions for Supply Curve Analysis in Public Buildings 52 Table 4.5: Summary of Possible Investment Mechanisms in the Public Sector 59 Table 4.6: Potential Solutions to EE Barriers in Public Buildings 69 Table 5.1: Summary of Energy Savings Potential and Investment Costs, by ESM Package and Building Type 72 Figures Figure 2.1: EE Enabling Environment Framework 4 Figure 2.2: Summary of Assessment of the Enabling Environment for Belarus 6 Figure 3.1: Typology of Buildings Constructed before 1996 12 Figure 3.2: Overview of pre-1996 Residential Building Stock 12 Figure 3.3: Typical Schemes for Space Heating and Domestic Hot Water Supply in Belarus in Apartment Buildings 13 Figure 3.4: Percentage of Residential Buildings Nation-wide with Thermal Regulation 14 Figure 3.5: Energy Performance of the Residential Building Stock by Percentage of Floor Area 15 Figure 3.6: Annual Heat Consumption for Residential Buildings of Different Construction Periods, (kWh/m²) 16 Figure 3.7: Changes to Specific Heat Consumption over Different Construction Periods 17 Figure 3.8: Packages of Energy Saving Measures for analyzing pre-1996 Residential Buildings 18 Figure 3.9: Relevance of Each Package to the pre-1996 Building Types 19 Figure 3.10: Levelized Energy Cost of End-User Heat Control Package 23 Figure 3.11: Levelized Energy Cost of Simple Thermal Retrofit 24 Figure 3.12: Levelized Energy Cost of Deep Thermal Retrofit 25 Figure 3.13: Levelized Energy Cost of Deep Thermal Retrofit, with Low- Cost Financing and Capital Subsidy 26 Figure 3.14: Ministry of Finance On-Lending to Subnational Governments 30 Figure 3.15: Potential Arrangements for a Housing Retrofit Loan Fund 33 Figure 3.16: Roadmap for Scaling up Deep Thermal Retrofit of Residential Buildings 38 Figure 4.1: Typology of Public Buildings Built Before 1996 42 Figure 4.2: Overview of Educational Building Stock 44 Figure 4.3: Annual Heat Consumption in Schools by Period of Construction (kWh/m3) 45 Figure 4.4: Proportion of Healthcare Organizations in Belarus, 2000 47 Figure 4.5: Regional Distribution of Outpatient Polyclinic Organizations 48 Figure 4.6: Heat Consumption Standards in Outpatient Polyclinics by Construction Period 48 Figure 4.7: Levelized Energy Cost of End-User Heat Control, Public Buildings 53 Figure 4.8: Levelized Energy Cost of Simple Renovation, Public Buildings 54 Figure 4.9: Levelized Energy Cost of Deep Renovation, Public Buildings 55 Figure 4.10: Levelized Energy Cost of Deep Renovation with Low-Cost Financing, Public Buildings 56 Figure 4.11: Budget Capture Principle – After Retrofit 61 Figure 4.12: Potential Super ESCO Arrangement in Belarus 64 Figure 4.13: Potential EERF for Belarus with Debt Financing 67 Figure 4.14: Potential EERF for Belarus with ESA Window, Acting as a Super ESCO 68 Figure 4.15: Roadmap for Scaling up EE in the Public Sector 69 Boxes Box 3.1: Existing Approval and Financing Processes for Thermal Retrofits in Residential Buildings in Belarus 31 Box 3.2: Poland Thermo-Modernization Program 32 Box 3.3: Housing Renovation Fund in Lithuania 35 Box 3.4: An Integrated Strategy for Improving Fiscal Sustainability While Ensuring Affordability 40 Box 3.5: Heat Metering and Billing Reforms Unlock Adoption of EE in Buildings: Poland’s Experience 41 Box 4.1: World Bank Investment Projects aiming at Increasing EE in Public Buildings 43 Box 4.2: How Public Entities in Belarus Pay Energy Bills 62 Box 4.3: Budget Capture Mechanism for Municipal Services Improvements in Macedonia 63 Box 4.4: The Energy Service Agreement (ESA) 65 Box 4.5: Super ESCO and EERF in Armenia – R2E2 Fund 66 List of Abbreviations CAPEX Capital expenditure CEEF Central and Eastern European Fund CHP Combined Heat and Power DH District heating DSM Demand-side management ECA Europe and Central Asia EE Energy Efficiency EEO Energy Efficiency obligation EERF Energy Efficiency Revolving Fund EIB European Investment Bank EMS Energy management systems ERDF European Regional Development Fund ESA Energy service agreement ESCO Energy service company EMS Energy-saving measure ESMAP Energy Sector Management Assistance Program ESPC Energy service performance contract EU European Union EUR Euro Gcal Gigacalorie GDP Gross domestic product GEF Global Environment Facility GOB Government of Belarus GWh Gigawatt-hour HCA Heat Cost Allocator HESA Housing Energy Saving Agency HH Household HOA Homeowners' Association HoB Heat-only boiler HRF Housing Retrofit Fund HV Heating and ventilation IBRD International Bank for Reconstruction and Development IFI International financing institution JESSICA Joint European Support for Sustainable Investment in City Areas kWh Kilowatt-hour m Meter M&V Monitoring and verification MOF Ministry of Finance NGO Non-governmental organization OPEX Operational expenditure PFM Public financial management PIU Project implementation unit PV Present value R2E2 Renewable Resources and Energy Efficiency i RE Renewable energy RUE Republican Unitary Enterprise SNG Sub-national government TA Technical assistance TRV Thermostatic Radiator Valve UDF Urban Development Funds UNDP United Nations Development Program USD United States dollars ZhREO State Unitary Enterprises of Housing Repair and Maintenance ii Acknowledgements This study was carried out by a World Bank team in collaboration with the Energy Efficiency Department (EED) of the State Standardization Committee and the Ministry of Housing and Utilities (MHU). The task team included Feng Liu and Irina Voitekhovitch (co-task team leaders), Yelena Slizhevskaya (public institution expert, consultant), experts from NIPTIS – Leonid Danilevskiy, Sergei Terekhov, Irina Terekhova, Boris Tauroginskiy, Dmitrii Pozdnyakov, and staff of DHInfrastructure – Denzel Hankinson, Chris Parcels, Joshua Morrison and Deborah Ong (who prepared the draft report). The peer reviewers were Jas Singh (Senior Energy Specialist), Martina Bosi (Senior Energy Specialist), and Alexander Sharabaroff (Operations Officer, IFC). Additional advice was received from Pekka Salminen (Senior Energy Specialist) and Elena Klochan (Senior Country Program Officer). Ranjit Lamech (Practice Manager, Energy and Extractives Global Practice) and Young Chul Kim (Country Manager for Belarus, Europe and Central Asia Region) provided valuable guidance. The team would especially like to thank Mr. Sergei Semashko, Director of EED, and his team for guidance and feedback received over the course of the study. The team also benefited from the consultations with officials from MHU, Ministry of Finance, Ministry of Economy and the Minsk City Executive Committee. The study received funding support from the Energy Sector Management Assistance Program (ESMAP). iii Executive Summary Energy savings in The buildings sector is a large potential source of energy Belarus’ building savings for Belarus. More than 80 percent of the country’s stock is untapped residential stock, and about 95 percent of the public building stock was built before 1996. Building thermal protection standards were significantly strengthened in 1993 and updated in 2010. Pre-1996 buildings consume, on average, nearly twice as much energy per square meter as buildings constructed in the last four years. Deep thermal retrofits in these residential and public buildings could result in dramatic energy savings. 1 National final Deep thermal retrofit in all pre-1996 residential multi-family energy consumption buildings could save more than 12,000 GWh per year, while can be reduced by improving comfort levels for residents. In the public sector, 6.7 percent with deep thermal retrofit of educational, health and deep thermal administrative buildings could save 3,500 GWh of energy per retrofit year. 2 Combined, these savings equal about 6.7 percent of final energy consumption in Belarus in 2013. Deep thermal Substantial investments would be required to achieve these retrofit would cost energy savings. A total of USD 14.2 billion would be required USD 17 billion and for deep thermal retrofit of residential buildings. An could largely be additional USD 2.7 billion is needed for public buildings. If paid for by energy heat tariffs are set at cost-recovery levels, the retrofits have cost-savings simple payback periods ranging from 1 to 3 years, for 1 ‘Thermal retrofit’ can include energy efficiency measures which reduce a building’s heat load, such as thermal insulation of exterior walls, roofs and basements, thermal upgrade of windows and exterior doors, and other weatherization measures. In this report, deep thermal retrofit refers to a package of energy-saving measures that includes all of the aforementioned thermal upgrades and the installation of thermal radiator valves and heat cost allocators. 2 The figures took into consideration (netted out the impact of) the measures already implemented in the residential sector within the capital renovation programs and by households themselves; and in public buildings sector by local authorities. iv installation of end-user heat control measures, and up to 16 years for deep thermal retrofit, depending on the building type and considering the current conditions of energy supply.3 While having Several European studies have found that USD 1 million significant economic invested in energy efficiency (EE) can result in USD 3.5 – 4.4 benefits such as million in benefits such as increased tax revenues, lower sustaining jobs… operating costs, and reduced unemployment and subsidies.45 Building retrofits, in particular, can be labor-intensive and create mostly non-exportable jobs, with 16–21 jobs created for every USD 1 million invested.6 Large scale investments in deep thermal retrofit, for example, at USD 1 billion per year, could sustain 16,000 jobs over a 17-year period.78 …and enhancing Belarus relies heavily on imported natural gas to meet its energy security. energy needs. At 2015 import prices, deep thermal retrofit of pre-1996 residential and public buildings would result in at least USD 578 million of natural gas savings per year from reductions in heat consumption.9 If the price of natural gas 3 Residential heat tariffs are well below the cost of service and some public entities currently pay a lower, preferential heat tariff. 4 KfW, Impact on Public Budgets of the KfW Promotional Programs “Energy-Efficient Construction”, “Energy- Efficient Refurbishment”, and Energy-Efficient Infrastructure” in 2011. Frankfurt, KfW, April 2013. 5 A study commissioned by Natural Resources Canada modelled the impact of EE programs on the economy and found a net increase in employment of 52 job-years per million dollars of program spending. For more information see: Energy Efficiency: Engine of Economic Growth in Canada, commissioned by Natural Resources Canada, Ottawa, March 2014 6 Center for Climate Change and Sustainable Energy Policy, Central European University, 2012. Employment Impacts of a Large-Scale Deep Building Energy Retrofit Program in Poland: Executive Summary. Den Haag: European Climate Foundation. 7 Calculations were made to convert estimates related to job creation from Euros to United States dollars using the average exchange rate from January to June 2015, where 1 USD = 0.896 EUR. 8 Note that the estimate is likely to be conservative since it does not take into account lower wages in Belarus. 9 3 Natural gas savings are calculated using the gas price charged to utilities of around 250 US/1000 m in 2015 (by Resolution of the Ministry of Economy No.94) and assumes that 63 percent of heat fuel consumption is from natural gas. v imports were to increase to EU levels, import savings would amount to at least USD 799 million per year.10 To seize this Thermal retrofits are often financially unattractive (long economic payback periods for investments) even with full cost-recovery opportunity GoB heat tariffs and require financing facilitation by government support is required (table below). The Government of Belarus (GoB) can help to raise capital and raise the capital and facilitate financing required for facilitate financing… investments by introducing sustainable financing and delivery mechanisms. A steady flow of funds, through a national program, will be needed to incentivize private borrowing and commercial lending for thermal retrofit in residential buildings. For public buildings, energy cost savings can be allowed to revolve and be used in future rounds of thermal retrofits. This will establish clear financial and performance accountability of EE investments in the public sector and stimulate the mobilization of commercial financing and the development of the EE service market, significantly increasing government fiscal space. …and address Legal and regulatory, as well as incentive-related, technical implementation and financial barriers must be addressed in order to achieve barriers… the savings potential. In the residential sector, important barriers include below-cost heat and electricity tariffs, a scarcity of well-developed homeowners’ associations, low penetration of consumption-based billing for heat at the apartment level, and limited access to long-term, affordable consumer credit lines. In the public sector, strict, annual line- item budgeting and restrictions on public financing and procurement of energy efficiency services are critical barriers. For residential Several important measures can remove the implementation buildings: barriers described above, enable rational economic decision-  Tariff reform making, and introduce sustainable financing and delivery  Consumption models. For residential thermal retrofit, the GoB’s plan to increase residential heat tariffs to cost-recovery levels by 10 Natural gas savings are calculated using the weighted average price of natural gas exported by Gazprom to 3 European markets at 345.37 US/1000 m in 2014. vi based heat billing 2020 is a first step to introducing sustainable financing and  Access to low-cost delivery models. Consumption-based billing for heating at the and long-term apartment level (requiring installations of thermal radiator financing valves and heat cost allocators) should also be introduced in  Pilots and parallel to support tariff reform. When consumers have the demonstrations of ability to adjust heat consumption and pay for what they use, financing and they have stronger incentives to invest in EE. With these delivery models measures in place, a pilot program to test and put in place a scalable financing and delivery mechanism could be introduced in 3 years. The program can focus on the establishment of a transparent incentive scheme and operational model that engages homeowner associations, banks, and energy service providers. A system of acceptance (e.g., energy performance certification) for buildings which have undergone deep thermal retrofit should also be put in place. If the pilot program is successful, a national program could be rolled out within 5 years. For public buildings: In the public sector, the GoB could introduce regulatory  Revolving public EE changes to allow for greater flexibility in public sector investment funds budgeting and finance, specific to energy efficiency  Enabling multi-year improvements. Such changes include allowing multi-year energy savings contracting for energy efficiency services, and allowing energy performance cost savings retention by subnational governments (SNGs) contracting and other public entities. Adjustments in public procurement,  Pilots and to allow life-cycle cost considerations and facilitate energy demonstrations of performance contracting, would also improve the enabling financing and environment. Making these legal changes in the next two delivery models years would pave the way for a pilot program to operationalize the revolving of energy cost savings in public sector EE investment projects and the establishment of scalable and sustainable arrangements for financing EE in the public sector, including a dedicated EE revolving fund and the use of energy savings performance contracting. This pilot can also be scaled up to a national program within five years, as with the pilot for residential buildings. vii viii 1 Introduction The Republic of Belarus relies heavily on natural gas imports to meet domestic energy demand. Gas is imported at prices below those elsewhere in the region, but the nominal cost of gas has risen by about 14 times since 2006, from 100 BYR/m3 to 1,400 BYR/m3 in 2014 in part due to inflation and depreciation of the Belarussian ruble. In 2013, natural gas imports amounted to 4.5 percent of GDP or USD 3.29 billion. Of these gas imports, 70 percent is used to fire heat- only boilers (HOBs) or combined heat and power (CHP) plants. Significant efforts are made to reduce natural gas consumption; the share of domestic and renewable energy sources in fuel mix for electricity and heat generation is already 26.3 percent (2014). The building sector (including residential, public and commercial buildings) accounts for about 38 percent of the total final energy consumption in Belarus, compared with 23 and 22 percent for industry and transport, respectively. More specifically, the building sector consumes 67, 47 and 33 percent of the total final supply of heat, electricity and natural gas, respectively11. It is therefore a major focus of the government’s energy efficiency efforts. Much of the building stock in Belarus was built before 1996 when strengthened thermal insulation was not commonly required or practiced. These buildings consume almost twice as much energy per square meter for space heating than those built within the last four years, which comply with EU level thermal insulation standards. Specifically, 82 percent of the residential building stock, 95 percent of kindergartens and secondary schools, nearly all outpatient polyclinics, and 98 percent of administrative buildings were built before 1996. Moreover, most of these buildings are not equipped with thermostatic radiator valves (TRVs), limiting the ability to control room temperature and causing significant heat energy waste during the warmer months of the heating season. The physical heat losses have fiscal consequences. Residential heating tariffs are currently 75 to 81 percent below the cost of service and are subsidized through direct fiscal transfers and cross-subsidies from electricity tariffs, and non-residential customers. The total fiscal and quasi- fiscal cost of heat subsidies amounted to roughly 1.5 percent of GDP in 2013, and another 1.4 percent of GDP is transferred through cross-subsidies from non-residential to residential customers, undermining industrial competitiveness.12 Energy expenditures in schools account for about 45 percent of non-wage operating costs. In health sector buildings, energy expenditures are about 16 percent of non-wage operating costs. Energy efficiency investments can significantly reduce budget outlays in the long-term while also improving the physical assets and quality of energy services. Investments in thermal retrofits of public and residential buildings can result in substantial economic benefits. The economic benefits come from increased tax revenues, lower operating costs, lower subsidy requirements, and employment resulting from the development of an EE service industry. Several European studies have found that USD 1 million invested in EE can result in USD 3.5 – 11 Energy Statistics, International Energy Agency, http://www.iea.org/statistics/ 12 World Bank, “Heat Tariff Reform and Social Impact Mitigation: Recommendations for a Sust ainable District Heating Sector in Belarus”, 2014. 1 4.4 million in benefits. Building renovations, in particular, can be labor-intensive and create mostly non-exportable jobs, with 16–21 jobs created for every USD 1 million invested. Large scale investments in deep thermal retrofit, for example, at USD 1 billion per year, could sustain 16,000 jobs over a 17-year period. Investment in EE can also enhance energy security. At 2015 import prices, deep thermal retrofit of pre-1996 residential and public buildings would result in at least USD 578 million of natural gas savings per year from reductions in heat consumption. If the price of natural gas imports were to increase to EU levels, import savings would amount to at least USD 799 million per year. Recognizing the substantial energy savings potential in the buildings sector, the Government of the Republic of Belarus (GoB) has introduced policies and programs to promote the development of more energy efficient buildings, and the retrofitting of old buildings. The Integrated Program for Design, Construction and Renovation of Energy-Efficient Housing in the Republic of Belarus for 2009-2010 and until 2020 sets a national target to reduce specific heat consumption in existing residential buildings by 60 kWh/m2 through EE retrofits. The Program on Regulation, Standardization and Compliance Confirmation in Energy Saving for the period of 2011 – 2015 introduced energy passports, and EE building certificates. Technical regulation, which sets standards for the specific heat consumption of residential and public buildings has also been introduced. The National Housing Policy Concept (2013) further requires that all residential buildings built after 2013 should be designed according to energy-efficient standards, which limit energy consumption for heating and ventilation to a maximum level of 40 kWh/m2 per annum. As of 2012, about 1.1 million m2 of energy-efficient residential buildings were built in Belarus. Significant progress has therefore been made, but barriers remain. Financing for EE retrofits of existing buildings is limited, and mostly supported by the state budget. In the past 15 years about 15 million m2 of residential buildings (roughly 7.5 percent of the pre-1996 stock) was rehabilitated. However, the current legal and regulatory framework gives heat consumers few incentives to make such investments. The objective of this study is to assess the investment needs and implementation constraints for scaling-up thermal retrofits and heating system upgrades in residential and public buildings, and to recommend suitable financing and delivery models for such investments. The report is structured as follows:  Section 2 assesses the progress GoB has made in creating an enabling environment for EE, and outlines areas where improvements could be made  Section 3 describes the characteristics of the residential building stock, analyzes the potential for space heating EE improvements , identifies barriers to EE in residential buildings, and recommends financing options and a roadmap for scaling up investment in thermal retrofit of pre-1996 residential buildings  Section 4 describes the characteristics of the public building stock, analyzes the potential for EE improvements in space heating, identifies barriers to EE in public 2 buildings, and recommends options for financing EE improvements in them, and sets out a roadmap for developing sustainable EE financing for public buildings. The appendices contain additional data and analysis referenced in the main body of the paper. 3 2 Enabling Environment for EE in Buildings International experience has shown that a successful enabling environment for EE in buildings requires a robust foundation supported by five “building blocks”: EE legislation and governance, buildings sector policy and regulation, market conditions, financing and implementation, and capacity building. A number of indicators have been developed to assess a country’s specific progress in each of these areas (Figure 2.1). Most indicators have binary outcomes, such as “yes” or “no”, to reflect specific actions, such as the adoption of a sector strategy or EE targets by sectors. Others are numeric, for example, the percentage of buildings with building level metering. Some of the scoring is qualitative but it provides a rough assessment of a country’s progress in adopting good practices on EE, and indicates gaps that can be areas for future activity. Figure 2.1: EE Enabling Environment Framework Source: Adapted from World Bank, “Western Balkans: Scaling Up Energy Efficiency in Buildings”, 2014. 4 Belarus’ progress against each indicator was scored qualitatively.13 The percentage shown on Figure 2.2 represents progress made in that area so far, where the maximum score is 100 percent. Based on the analysis above, areas pertaining to broad EE legislation and governance, and capacity building are relatively strong. Building sector regulation and market conditions are modest. Financing and implementation is the weakest for scaling up EE in buildings. The subsections below provide more detail on what Belarus has achieved in each area, and what work still needs to be done. Building sector policy and regulation The GoB has taken important steps to improve the legal and regulatory environment for EE in buildings:  The Council of Ministers issued Decree # 1820 ‘On Additional Measures for Efficient Use of Fuel and Energy Resources’ in 2003, requiring all new and capitally renovated buildings to be equipped with individual heat substations; all public buildings, central heat substations and multi-apartment buildings (80 flats and more) to be equipped with heat and water meters and systems of heat energy regulation, and all billing to be based on the meters installed. This policy had good results. More than 95 percent of apartment buildings (with more than 20 apartments, connected to DH systems) are now equipped with heat and hot water meters.  Decree # 45 ‘On measures to increase operational efficiency of housing stock, public and social sites and protection of consumer rights of utility services’ in 2003 envisioned the start of capital renovations of apartment buildings constructed under the first standardized design series of large scale construction. It also required that technical standards be set for apartment level regulation and metering of heat consumption in all new, reconstructed and capitally renovated buildings. Over the last 15 years, around 15 million m2 of floor space were capitally renovated14.  The Ministry of Architecture and Construction released a national building EE strategy in 2009, which set quantitative targets for building EE through 2020. 15 It is supported by the Program on Regulation, Standardization and Compliance Confirmation in Energy Saving for the Period 2011 – 2015 (2011); and the National Housing Policy Concept (2013). 13 Each building block comprises of a set of indicators which was scored against a stoplight rating scale as green, yellow, or red. An indicator received a green rating if all of its sub-indicators were implemented, a yellow rating if at least one sub-indicator was implemented, and a red rating if none of its sub-indicators had been implemented. The indicators were then scored, where an indicator with a green, yellow or red rating obtained three, two, and one points respectively. Finally, the total score for each building block was calculated as a percentage of the maximum possible score for that category. 14 Program on Housing and Utilities Sector Development by 2015. 15 Resolution of the Council of Ministers № 706 01.06.2009, “On approval of a comprehensive program for the design, construction and reconstruction of energy efficient residential buildings in the Republic of Belarus for 2009-2010 and until 2020” 5 Figure 2.2: Summary of Assessment of the Enabling Environment for Belarus Source: Authors 6  Upgrades to the building code were passed in 1993 and 2010, each representing large increases in thermal performance of buildings.16 For example, a five-floor building built before 1996 has a specific heat consumption standard of 169 kWh/m 2, but a new five-floor building has a standard of just 48 kWh/m2, a 72 percent reduction.17  The GoB has also adopted standards for building insulation materials, and for the energy performance of windows and glass, lighting, air conditioning and refrigeration. These standards are in line with EU standards.  The GoB recently released a plan to have residential heat tariffs reach full cost recovery by 2020, while mitigating poverty and social impact. This will dramatically reduce payback periods for EE investments and increase financial incentives in both the public and residential sectors. The existence of EE policies and regulations, and initial positive results, is an excellent first step, but in Belarus—as in many countries in the region—monitoring and enforcement remain weak. More specifically:  While inspections of new buildings are conducted, energy commissioning18 is not.  There are no specific requirements in the public procurement rules requesting the government to purchase or give the priority to products or services with increased level of energy efficiency compared to the existing standards and no policies or regulations supporting energy savings performance contracts (ESPCs).  Access to data on energy performance of the existing building stock is limited. There is little information on the building types, market size, energy consumption, EE potential or EE investment needs in either the residential, commercial or public buildings market.  Workmanship on wall insulation has deteriorated over time. Regulations on the design, installation and acceptance of thermal insulation projects are in place, but there is a lack of enforced compliance. Workmanship has consequently declined, as lower-quality insulation systems generally win tenders by keeping their bid prices low (Appendix I). EE legislation and governance The legal framework was established in 1998 with the adoption of the Law on Energy Saving, and currently takes into consideration new regional and world developments19. The 16 Buildings from 2011 and later comply with current thermal protection standards passed in 2009. Buildings from 1996 to 2011 were built according to standards passed in 1994. These buildings could be upgraded to meet current thermal standards, but are not due for major repair for 25 years, so structural thermal upgrades are unlikely to occur soon. 17 A United Nations Development Program (UNDP) project is currently underway in Belarus to incorporate EU Building Directives and EE Codes into Belarussian norms and standards. 18 Energy commissioning refers to a systematic review of a building’s energy performance to ensure that the building’s energy performance performs according to the design intent and the building owner’s operational needs. 7 development of the legal framework is being mainly shaped by the state agencies, with limited inputs from private and non-government sectors. More specifically:  The legal framework seems to have been informed by limited market data and analyses.  Participation of civil society and the private sector is limited in the formulation of and consultation on EE policies. Neither are represented on a national board of experts that was established to enhance the use of EE technologies.20 Market conditions Market conditions are beginning to improve for EE investments in Belarus. For example, the Law on Energy Saving requires mandatory energy audits for legal entities with annual fuel and energy consumption of more than 1,500 tons of coal equivalent (tce). The Law also defines requirements for the outputs of energy audits. Incentives and financing for EE investments are available for industrial and commercial consumers, but are lacking for the residential sector:  Industrial and commercial electricity prices are above cost-recovery levels but residential tariffs for electricity, gas and district heating (DH) are not. However, the tariffs for electricity are steadily increasing and are projected to reach 80 percent of cost recovery by the end of 2015. The situation with heat tariff increase is not as optimistic. The current level of cost recovery is around 15 percent. This level of heat cross-subsidization undermines incentives for EE by increasing the payback period for EE investments.  EE obligations (EEOs) for different utilities are in place but have not been implemented.  Commercial bank financing for EE investments is available to some extent in the commercial and industrial sectors, but only one bank offers EE loans to the residential sector. No commercial financing is available in public sector for building EE projects.  Apartment-level heat control and consumption-based billing are absent in most residential buildings, reducing homeowners’ incentives to conserve energy and invest in thermal retrofits. Capacity building Capacity building of energy auditors and energy service providers is quite strong in Belarus:  Belarus has programs for training and certifying energy auditors. As of January 2015, 28 energy auditing firms had been certified to provide energy auditing services to organizations.21 19 In January 2015, the GoB passed a national EE law, the Law of the Republic of Belarus № 239-Z “on Energy Saving”, to support implementation of the national building EE strategy. 20 Experience in the region suggests that stakeholder consultation, while potentially time-consuming, can greatly improve the legal framework. This is true primarily because of the cross-sectoral nature of EE measures. 8  There have been a number of donor-funded programs to build the capacity of energy service providers, and energy management systems (EMS) for large energy users have been introduced, and have training programs. Capacity building is weak in other areas, however:  There are not yet programs to build capacity of energy managers, or certify them.  There are no regular measurements or evaluation of end-user practical awareness of EE or other types of feedback provision. EE information is provided to the population through special educational courses and advertisements, but it would help to sharpen the focus of the outreach and improve on the materials used.  Data for the EE performance of retrofits in the public and residential sectors do not seem to be made publicly available. Handbooks or guides for EE have been developed, but there is no database of EE case studies in Belarus.  There is a lack of confidence in, and awareness about the effectiveness of EE measures. For example, a thermal retrofit contractor interviewed for this study claimed that low awareness about technological and economic benefits of construction technologies among designers, developers and contractors leads to a lack of trust about the possibility of fully realizing the EE potential of thermal retrofits (Appendix I). Financing and implementation Existing options for long-term, affordable financing for EE investments in the building sector in Belarus are limited. There are no financial incentive programs or dedicated funds for EE investments or audits in buildings. Energy service companies (ESCOs) do not exist. Other important barriers to financing and implementing EE improvements include:  Homeowner associations (HOAs) are not well developed and are unable to take loans, leaving apartment owners to implement energy saving measures from their own collective funds. Moreover, consumer credit is limited, and with high interest rates. Lenders are generally unfamiliar with EE technologies and as a result have not provided substantial financing for thermal improvements. Moreover, EE measures are generally not considered as a way to improve the quality/value of the property and thus not duly reflected in the market prices;  While there is an existing government program to provide low-interest loans to low- income consumers living in small cities to implement EE measures, including thermal retrofits, it has a long waiting list and limited resources.22 In addition, starting in 21 These trainings are given at the Belarusian State Institute of Advanced Training and Retraining in the Field of Standardization, Metrology and Quality Control. There have also been several donor-funded training programs for energy auditors, including programs funded by the EU and UNDP/GEF. Auditors (both individual auditors and energy audit organizations) are certified by RUE “BelGIM”. Recertification is required every three years. 22 The program is based on the Presidential Decree #75 as of February 7, 2006. Loans are given for capital repairs and reconstruction of residential buildings, construction of engineering networks, etc. for low-income citizens - owners of residential premises, permanently residing and working in settlements with a population up to 20 thousand. The maximum 9 January 2015, the GoB reduced public financing for thermal retrofits; which will be included in the scope of capital reconstruction of apartment buildings, but to a very limited extent23.  Public entities are prohibited from borrowing, leaving them only their annual budget allocations. They cannot enter into multi-year contractual obligations (unless supported by an act of Government or the President). Line-item budgeting limits incentives to save energy.24  Fragmentation of responsibilities in the public sector makes coordination of bundled procurement and investment in EE improvements more complex.25  There is a lack of donor investment grant programs or credit lines in the public, residential or commercial building sectors  International donor activity is mostly concentrated on supply side energy efficiency, covering the modernization of boiler houses and heat networks. Special large scale programs on demand-side EE are largely absent.26 size of a soft loan - 90% of the costs, defined by design documentation. The loan amount should not exceed the threshold of 300 base values (around 3600 USD), period – up to 10 years, annual interest rate 3% (BYR). 23 Decree of the Ministry of Housing Utilities of the Republic of Belarus as of January 27, 2015 #3 24 Annual appropriations are set up as detailed line items, and budget cannot be reallocated from one line item to another. As such, public officials feel compelled to spend all that was budgeted under a particular line item to ensure that their budgets are not reduced in the next planning period. 25 Different levels of government are responsible for different types of institutions. For example, expenditures of post graduate schools are financed by the republic budget while expenditures for lower level educational institutions such as pre-schools might be financed by oblast and base tier budgets. 26 Over the last three years, there have been no donor investment grant programs or credit lines in the public, residential or commercial building sectors. In 2001 and 2006, the World Bank funded the Post-Chernobyl Recovery and Social Infrastructure Retrofitting demand side energy efficiency projects, respectively. These two projects included energy retrofits in social and public buildings, such as schools, hospitals and orphanages. The ongoing Energy Efficiency project, funded in 2009, is helping to reduce gas consumption and total efficiency in heat and power generation by converting six existing heat- only boiler plants to combined heat and power plants in different locations across Belarus. 10 3 Scale Up Thermal Retrofit of Residential Buildings Roughly 82 percent (or 197.7 million m2) of the residential building stock in Belarus was built before 1996, when buildings were constructed with little consideration for EE. Given the fact that buildings are generally due for major repair every 25-30 years after construction, there is a significant and increasing demand for structural thermal upgrades. Section 3.1 provides an overview of the pre-1996 residential building stock, including heating systems and energy performance of the buildings. Section 3.2 analyzes the technical, financial and economic potential of selected energy savings measures that could be implemented. Section 3.3 identifies barriers to thermal retrofit of residential buildings. Section 3.4 presents potential options for financing thermal retrofit. Section 3.5 concludes with a roadmap for scaling up thermal retrofit in residential buildings in Belarus. 3.1 Characteristics of the Residential Building Stock Total residential floor area in Belarus was 243.5 million m2 in 2013, up from 197.7 million m2 in 1995. Because most of the residential stock was rebuilt after the Second World War, there are only a few building types (where types are defined by the structural concepts and materials used). There are three main building types, and their heat consumption varies substantially (Figure 3.1). In buildings built before 1996, roughly 17 percent of all dwellings are in stand-alone wood buildings (”Single Family” buildings). Another 31 percent of dwellings are in two-to-three-floor brick or panel buildings (”<5 Floor” buildings). The remaining 51 percent of dwellings are in brick or panel buildings of five floors or more (”>5 Floor” buildings) (Figure 3.2). Homeownership in Belarus is high. Roughly 90 percent of apartments and single-family homes are privately-owned.27 Energy performance of the housing stock based on standard series of residential buildings is provided in Appendix L. 27 The private residential stock includes buildings owned by individuals, by non-public organizations, and the mixed residential stock, which includes buildings owned by organizations with a mixed form of ownership, sometimes including foreign entities. 11 Figure 3.1: Typology of Buildings Constructed before 1996 Source: Authors, based on data from Pilot project on energy saving measures in building and residential sector of Belarus, EBEL-9502-1997 Figure 3.2: Overview of pre-1996 Residential Building Stock Source: Authors, based on data from Pilot project on energy saving measures in building and residential sector of Belarus, EBEL-9502-1997. 3.1.1 Heating Systems There are three types of heat supply and provision in Belarus: district heating, individual natural gas boilers, and individual wood, coal boilers and stoves. Urban households are mostly served 12 by district heating systems (around 80 percent of urban households), while rural households more typically use individual boilers and stoves (around 85 percent of rural households). District heating (DH) supplies heat and domestic hot water (DHW) to a total of 61 percent of the households in Belarus. Almost all of pre-1996 <5 Floor and ≥5 Floor buildings are supplied with heat and DHW by group heat substations (GHSs), using a separate secondary network (two pipes for heat and two pipes for DHW). These buildings in general have building-level heat control responding to outdoor temperature instead of a building-level heat substation. All new multi-apartment buildings are equipped with the modern building level heat substations. Figure 3.3 depicts the two type of heat and DHW supply schemes. Figure 3.3: Typical Schemes for Space Heating and Domestic Hot Water Supply in Belarus in Apartment Buildings Source: Authors Where possible, heat exchange at the building level substation for both space heating and DHW has greater EE than when conducted at group heat substations, which distribute heat and DHW to many buildings. 13 Only 9 percent of the multi-apartment buildings in Belarus have thermostatic radiator valves (TRVs) to control heating (room temperature) at the apartment level (Figure 3.4). TRV installations in pre-1996 buildings are virtually non-existent. Figure 3.4: Percentage of Residential Buildings Nation-wide with Thermal Regulation Source: Authors, based on legal and statistical data Metering for heating and hot water is done at the building-level for more than 95 percent of the multi-apartment residential buildings in Belarus. Almost all apartments are equipped with hot water meters while only around 9 percent have space heating meters. Heating costs are thus typically distributed among households by a factor of the floor area of their apartments, rather than the heat they use. 3.1.2 Energy performance Residential buildings in Belarus account for roughly 44 percent (23.4 million Gcal in 2013) of all heat consumption in the country. The proportion has remained approximately the same for the last 10 years. Metered consumption data shows that heat energy performance of residential buildings is much worse in standalone wooden buildings and buildings built before 1996 (Figure 3.5). 14 Figure 3.5: Energy Performance of the Residential Building Stock by Percentage of Floor Area Source: Authors, estimated based on metered data. Older buildings have substantially higher levels of heat consumption. For example, a one-to-two floor building in Minsk built before 1985 consumed 445 kWh/m 2 per year.28 For the same type of buildings built between 1985 and 1995, consumption was 361 kWh/m 2. For the 1995 to 2003 construction period, consumption in one-to-two floor buildings was 126 kWh/m2, about 72 percent lower than the consumption for pre-1985 buildings of the same height. Other types of residential buildings in Minsk see substantial energy reductions by construction period, as do buildings in Baranovichi and Novopolotsk (Figure 3.6). 28 Standardized energy consumption for heating and ventilation in public and residential buildings is usually set for indoor air o o temperature at the level of 18 C. Actual temperature level is typically 21-22 C. 15 Figure 3.6: Annual Heat Consumption for Residential Buildings of Different Construction Periods, (kWh/m²) 500 450 400 350 kWh/m²/year 300 250 200 150 100 50 0 1 to 2 3 to 4 - 5 to 8 - 9 and 1 to 2 3 to 4 - 5 to 8 - 9 and 1 to 2 3 to 4 - 5 to 8 - 9 and up up up Minsk, Smolevichi Baranovichi Novopolotsk pre-1985 1985-1995 1995-2003 Note: 1. The pre-1985 category excludes buildings that have received thermal upgrades as part of major renovations; 2. The 1985-1995 category excludes buildings that were built “with consideration of heating upgrades”; 3. For the 1995-2003 category, only compound panel buildings are included for buildings of at least 3 floors. Source: Authors, based on metered data and standards in SNB 4.02.01-03 “Heating, Ventilation and Conditioning” and TCP 45-2.04-196-2010 “Heat Protection of Buildings. Heating Properties. The Method of Determination”. 16 Heat consumption in <5 Floor and >5 Floor residential buildings differs over three periods of construction: before 1996, from 1996 to 2011, and after 2011. Heat consumption is much higher in buildings built before 1996 than in buildings of the later construction periods. (Figure 3.7). Figure 3.7: Changes to Specific Heat Consumption over Different Construction Periods Source: Authors, based on metered data and standards in SNB 4.02.01-03 “Heating, Ventilation and Conditioning” and TCP 45-2.04-196-2010 “Heat Protection of Buildings. Heating Properties. Method s of Determination”. 3.2 Costs and Benefits of Thermal Retrofit The potential heat energy savings in the residential building sector is substantial. Most of the savings potential lies in buildings constructed before 1996, and could be achieved by implementing energy saving measures (ESMs). To allow for an aggregate national estimate of energy-savings potential and cost-effectiveness, the most suitable ESMs for these buildings have been grouped into three packages: end-user heat control, simple thermal retrofit, and deep thermal retrofit (Figure 3.8).  End-user Heat Control and consumption-based billing involves installing TRVs and HCAs on all radiators in each apartment. TRVs allow households to adjust the room temperature. HCAs are devices for allocating a building’s heat consumption among different apartments proportional to actual consumption. HCA data are collected electronically through a central unit at building level. This package is an important first step in any renovation project, as it gives households control over the amount of heat they consume and enable them to benefit from reduced heat bills. Experience in other European countries indicate that such a package usually result in 10 – 15 percent heat energy savings per buildings if under-heating is not a widespread problem (Appendix G).  Simple thermal retrofit adds window replacement to the end-user heat control package. Old windows are inefficient and have poor insulation properties, leading to high heat losses. Newer energy efficient double-glazed windows could reduce these losses by an additional 6 to 8 percent per building, depending on the building type. Total energy savings per building from the simple retrofit package can reach about 17 20 percent. Investments in window replacement are already taking place in households (reflected in further calculations), but this is still a small portion of the pre-1996 building stock.  Deep thermal renovation adds exterior wall and roof insulation to the simple renovation package. This is similar to what is referred to as “capital renovation” in Belarus. Better insulation of the building envelope can reduce heat losses by an additional 24 to 27 percent, depending on the building type. Total energy savings from the deep renovation package can reach 40 percent or more. While these packages allow for a manageable analysis of savings potential at national level, they are not intended for being used as model packages for thermal retrofit. Actual thermal retrofit projects require detailed energy audits to determine specific ESMs to implement to achieve a given level of post-retrofit thermal performance while meeting the cost-effectiveness criteria. Figure 3.8: Packages of Energy Saving Measures for analyzing pre-1996 Residential Buildings End-user Heat Simple Thermal Deep Thermal Package Control Retrofit Retrofit Simple Thermal End-user Heat Retrofit Package, TRVs and HCAs on all Control Package, plus thermal radiators in each plus window insulation of apartment*. replacement exterior walls and roofs Old windows are TRVs allow households to inefficient and air adjust the room temperature. permeable, leading to Better insulation of the HCAs are devices for allocating high heat losses. Newer building envelope can a building’s heat consumption EE double glazed reduce heat losses by an among different apartments windows could reduce additional 24 to 27 proportional to their actual these losses by an percent, depending on consumptions. This package additional 6 to 8 percent, the building type. Total gives households control over depending on the energy savings from the the amount of heat they building type. Total deep thermal retrofit consume and benefit from energy savings from the package can reach 40 reduced heat bills. It can result simple thermal retrofit percent or more in 10-15 percent energy Package can reach about savings. 20 percent. Note: * International experience has shown that this can be applied to vertical piping effectively. Source: Authors, based on data from “Heat Consumption in Residential Sector (Minsk)”, Mr. Krushanov Ruslan, Director of Belzhilproekt Institute. The baseline heat consumption of building types was estimated and verified using actual energy consumption data from residential buildings in Minsk. These baseline consumption values were then multiplied by the total floor space of each building type to determine its total energy consumption for heating. Relative savings from each ESM were estimated to determine how much energy could be saved by implementing each package in each building type. The total energy savings were also adjusted to take into account buildings that have already received 18 these upgrades29, or, in the case of the End-User Heat Control Package, buildings that cannot receive TRVs and allocators because the radiators are located within walls and renovations would be so costly and disruptive as to be financially unviable under any circumstances. End- user Heat Control is therefore only applicable in 79 percent of buildings. Simple and Deep Retrofits are applicable for 96 percent of buildings (Figure 3.9).30 Figure 3.9: Relevance of Each Package to the pre-1996 Building Types Note: For Simple and Deep Retrofit, 96 percent of the floor area would receive the additional measures (new windows and wall/roof insulation, respectively), but the area receiving TRVs and allocators would still be 79 percent. Therefore, some buildings would receive Simple or Deep Retrofit without receiving TRVs and allocators (where radiators are inside the walls). In addition, a survey of households Appendix H) conducted for this study showed that many respondents have already replaced their own windows (in Minsk this ratio could be as high as 40 percent). If true of the wider population, this would reduce the investment cost necessary for Simple and Deep Retrofit. For case studies of buildings that have already received thermal retrofits, see Appendix C. Source: Authors The savings from each package of ESMs is substantial. The End-user Heat Control package saves more than 3,000 GWh of heat energy per year. Simple retrofit can save about 5,500 GWh heat energy per year, and Deep retrofit saves more than 12,000 GWh heat energy per year. At 29 2 During the recent fifteen years about 15 million m of residential buildings have undergone capital renovation all over the country. Minsk has been a market leader in residential thermal retrofit. From 2007 to 2014 the city supported capital 2 renovation of 4.6 million m residential buildings. As a part of the effort to increase energy efficiency of Minsk City, Minsk City Housing Company introduced the system for remote regulation of building level heat consumption and data reading from heat meters (97.5% of building heat meters and 71.1% of building heat regulation systems in the Minsk have been connected to the system of remote reading and regulation). 30 See Appendix F for a more complete description of the methodology used to estimate savings. 19 current tariffs, however, few of these investments have reasonable payback periods. Simple and deep retrofits both have payback periods well over 100 years. Payback periods could be reduced dramatically by increasing tariffs to cost-recovery level. Table 3.1 shows the potential annual energy savings (in GWh) of each package, the capital expenditure (CAPEX, in USD) required to implement each package and payback periods at the current tariff (about USD 7.50 per Gcal, or USD 0.00645 per kWh) and at cost-recovery level (about USD 90 per Gcal, or USD 0.07739 per kWh, which is the cost of service estimated for small natural gas fired DH systems). It also includes the present value of the energy savings as a percentage of Belarus’ GDP (as of 2013). 20 Table 3.1: Summary of Savings Potential and Investment Costs, by Package and Building Type PV of Floor area (m2) Payback Payback Group of Annual energy CAPEX savings as Package receiving the period at period at buildings savings, GWh (million USD) % GDP measure current tariff cost-recovery (2013) <5 Floor 47,821,217 1,412 $ 143.16 16 years 1 year 0.23% End-User Heat Control >5 Floor 78,926,193 1,740 $ 234.72 21 years 2 years 0.28% <5 Floor 58,393,635 2,315 $ 1,733.27 116 years 10 years 0.39% Simple Retrofit >5 Floor 96,375,365 3,199 $ 2,948.39 143 years 12 years 0.55% <5 Floor 58,393,635 5,466 $ 6,176.39 175 years 15 years 1.01% Deep Retrofit >5 Floor 96,375,365 6,591 $ 8,047.84 189 years 16 years 1.21% Note: For Simple and Deep Retrofits, the total investment includes the cost of installing TRVs and allocators twice, as they need to be replaced every 10 years. The floor area receiving the TRVs and allocators remains the same as shown for End-User Heat Control. This means that some buildings will receive Simple or Deep Retrofit without receiving TRVs and allocators. Energy audit and design costs for deep retrofit vary depending on the size of the project. A rule of thumb estimate would be about 10 percent of CAPEX. A 10 percent increase in CAPEX would increase the payback periods of the deep retrofit by about a year. Source: Authors. 21 Supply curves offer a convenient visual way of analyzing the relationship between investment cost and savings. The levelized cost of energy saved is the cost of reducing a unit of energy demand (USD per kWh), discounted over the life of the implemented measure. This cost can then be compared to the current tariff as well as the full cost tariff, in order to determine which of the energy savings measures are financially viable, given current energy costs. Table 3.2 summarizes the assumptions used to create the supply curves. Table 3.2: Key Assumptions for Supply Curve Analysis Parameter Assumption Discount rate 25% (commercial borrowing rate) Asset life 20 years for insulation and windows 10 years for TRVs and HCAs Construction period 1 year Tariff needed to recover cost of supply by 0.04213 USD/kWh (49 USD/Gcal) the big DH systems under Ministry of Energy (CHP plants) Tariff needed to recover cost of supply by 0.07739 USD/kWh (90 USD/Gcal) the small DH systems under Ministry of Housing and Utilities (natural gas heat-only boilers – HOBs) Source: Authors. The EE supply curve for End-User Heat Control plots (on the x-axis) the cumulative energy savings potential of the package by building type and (on the y-axis) the levelized cost of the package for each building type (Figure 3.10). The horizontal lines show the current residential tariff and two estimates of the full cost of heating (depending on DH system type). 22 Figure 3.10: Levelized Energy Cost of End-User Heat Control Package Note: The energy consumption baselines shown here differ from those shown in Section 3.1. These baselines have been adjusted to assume an internal temperature of 24 C31, to allow a more accurate estimate of the potential energy savings of the ESM packages. Source: Authors. The levelized cost of TRVs and HCAs is higher than the current tariff. To be financially viable for end-users, the levelized cost of the package must fall below the level of the current tariff (the black line). Under the current end-user tariff, there would be no incentive for users to pay investments to install TRVs and HCAs because the levelized costs exceed the tariff. However, End-User Heat Control would be financially viable for both building types at both cost-recovery for heat supply by either the Ministry of Energy (CHP plants) or the Ministry of Housing and Utilities (HOB) because their levelized costs are below the blue and green lines that represent cost-recovery levels. 31 Based on limited surveys thermal comfort level in Belarus is found to be high, on average the indoor temperature is 21-22 C, many of apartments have up to 24 C 23 Neither Simple Retrofit nor Deep Retrofit is financially viable at commercial interest rates, as the levelized cost for both building types exceeds even the highest cost-recovery level for both packages (Figure 3.11 and Figure 3.12). Figure 3.11: Levelized Energy Cost of Simple Thermal Retrofit Source: Authors. 24 Figure 3.12: Levelized Energy Cost of Deep Thermal Retrofit Source: Authors. Deep Retrofit could, however, become financially viable with low-cost financing from International Financial Institutions (IFIs), along with a capital subsidy (Figure 3.13). The assumptions for the supply curve below are the same as in Table 3.2, but using 2.07 percent financing interest rate in place of the 25 percent discount rate, and with the addition of a 10, 20 or 40 percent capital subsidy. This simple analytical exercise clearly indicates the easy gains achievable by introducing TRVs and HCAs, as well as the huge financial challenge to scaling up deep renovation. The heat tariff reform planned by GoB would give households clear incentives and benefits from investing in TRVs and HCAs. However, even with full cost recovery tariffs, the energy cost-saving benefit alone would still be too small for households to justify investments in deep retrofit. Thus, the government has a critical role in helping secure long-term capital at attractive interest rate and in providing additional incentives to leverage private investments. 25 Figure 3.13: Levelized Energy Cost of Deep Thermal Retrofit, with Low-Cost Financing and Capital Subsidy Source: Authors. 3.3 Barriers to Scaling Up Thermal Retrofit Barriers to residential thermal retrofit in Belarus fall into the following categories: incentive- related barriers, financial barriers, and implementation barriers. The subsections below describe each of them in more detail. Incentive-related barriers  Heat and electricity tariff subsidies. Residential heat customers receive generous cross-subsidy from commercial and industrial heat customers. Residential heat tariffs are around 85 percent below cost-recovery levels. This significantly undermines incentives for implementing EE measures by increasing payback periods.  Absence of heat metering and controls at the apartment level. As described in Section 3.1, only nine percent of residential buildings are equipped with apartment level heat meters and TRVs. Heat is generally metered at the building level, but the household heating bill is generally based on the floor area of its apartment. Most 26 customers’ bills therefore have no direct relation to how much they consume, and the absence of TRVs means that—even if customers were billed on the basis of consumption—they would have no ability to change their consumption in response to price changes.  Long payback periods of some EE investments. At current tariff levels, both simple and deep retrofits have extraordinarily long payback periods, ranging from 116 to 189 years. In other words, these packages are not economically or financially viable based on energy cost savings justification. If tariffs are increased to cost-recovery levels32 however, the longest simple payback period amongst all the packages decreases significantly, to 16 years.  EE is undervalued by the market. Specific heat consumption for space heating and hot water supply is not considered to be an important market valuation criterion for residential flats or apartments because of the current low tariffs. Financing barriers  Inability of homeowners associations to take loans. The inability of homeowners associations to take loans and conduct building-wide thermal retrofits leaves homeowners to carry out individual small-scale retrofits, decreasing the cost effectiveness and thermal efficiency of improvements. According to the survey that was conducted as part of this study, about 70 percent of respondents in buildings that had not received thermal retrofits spent their own money to replace windows or entry doors.  Consumer credit is limited; interest rates are high and loan terms short. Private investments in deep retrofit are more likely if low cost financing with long loan terms are available. This is particularly true if a long payback period is needed to achieve energy cost-savings from investments.  Limited of government financial resources to support thermal retrofits. The existing government program, which provides low-interest loans to individual households to conduct different EE measures (including thermal retrofits), has a long waiting list, limited resources and is available only for low income households in small cities. Beginning in 2015, the GoB reduced public financing for thermal retrofits. Previously, when multi-apartment buildings were selected for capital improvements, costs for thermal retrofit were included in the scopes of work and the costs shared by the households and public sector (20 percent by the households, 80 percent by the public sector). As of 2015, the cost of thermal retrofit will still be included in capital modernizations, but to a more limited extent. Public funds will be available to subsidize the capital renovation, but expensive thermal retrofits will be included in the renovation only if a technical review finds that defects in the building envelope have an impact on the building’s structural integrity. 32 The existing cost recovery level was taken into consideration for this study. In reality the cost recovery level may change due to efficiency improvement or new investment. The study did not make tariff projections. 27 Implementation barriers  Lack of proven sustainable and scalable commercial model. The largely government-financed capital renovation program has implemented deep thermal retrofit in a significant number of buildings. With an 80 percent capital subsidy, it is not a sustainable financing model. These projects are exclusively implemented through the existing state unitary enterprises of housing repair and maintenance (ZhREO) with limited engagements of the private sector energy service providers, and without the involvement of commercial banks. Reforms in the housing and utility sector have been planned, and when implemented, will likely have significant implications on the feasibility of the delivery model used in the capital renovation program so far.  Lack of awareness. Belarus is working with the population to promote awareness of EE for end-users, however there is no regular measurements or evaluation of end- user practical awareness of EE or other types of feedback provision. Awareness of the technological and economic benefits of construction technologies is quite low among designers, developers and contractors. 3.4 Options for Financing and Delivery Regional experience with residential retrofits indicates that there are a number of options for overcoming the barriers described in Section 3.3, and facilitating the scale up of EE investment in residential buildings. These options are summarized in Table 3.3 and described in greater detail in Appendix D. As the commercial market for EE financing is not yet established in Belarus, the option considered most suitable for Belarus is the EE fund option, with two potential variations. One involves the Ministry of Finance (MoF) on-lending to the municipal housing agencies or another municipal-level implementation entity and one involves the establishment of a national housing renovation fund (Table 3.3). These options are presented in the following sub-sections. 28 Table 3.3: Summary of Possible EE Financing Mechanisms in the Residential Sector Option Pros Cons EE Funds  Can be sustainable; mandated to  May distort market Independent entity promote EE  Could create monopoly providing financing for  Can develop specialized products;  May not operate efficiently EE (e.g., loans and centralized experience and lessons  Can be captured by political interests guarantees) Commercial Bank  Sustainable  Only serves creditworthy customers Financing  Allows for competition of financing  May involve high interest rates and builds off existing credit system  Banks may lack incentive to market aggressively Partial Credit  Encourages commercial banks to  Requires mature banking sector Guarantees finance EE interested in EE financing Offering coverage of  Helps overcome risk perception of  May need substantial capacity building of potential losses from EE banks banks loan defaults  Can lead to sustainable commercial  May serve only creditworthy customers financing Utility EE programs  Can be done sustainably  Utilities lack incentives to reduce energy in the form of DSM or an  Builds on utility relationships and sales EEO scheme services  Regulations may limit new utility services,  Allows for simple collections (on-bill billing repayment)  Can create a monopoly Source: Western Balkans: Scaling Up Energy Efficiency in Buildings.” 2013. The World Bank Group. Ministry of Finance On-Lending to Subnational Governments This potential national scheme builds on the existing implementation system of the capital renovation program (Box 3.1), but dedicated specifically with residential thermal retrofits, using debt financing arranged by the national government. The primary objective of such a program is to demonstrate a scalable delivery mechanism for deep thermal retrofit using debt financing, thus paving the way for commercial financing in the long-term. It differs from the existing capital renovation program in two main areas: (1) the share of capital grant will be substantially lower. For example, instead of 80 percent, a 40 percent capital grant may be considered (the actual level will need to be further analyzed based on in-depth market studies); and (2) the role of HOAs will be much more important since substantially higher monthly fee contribution from households will be needed in order to pay for the loaned amount of the investment. As a result, households are likely to have a much stronger interest in participating in the decision making process and in the quality of retrofit work. Under this arrangement, the Ministry of Finance uses budget resources or low cost capital from international finance institutions (IFIs). The funds would be on-lent to subnational governments (SNGs) through a central agency (e.g., Ministry of Housing and Utilities). The SNGs will be responsible for the selection and approval of the buildings for thermal retrofit. ZhREO or other municipal implementation entity will be responsible for implementing the thermal retrofit projects (Figure 3.14). Grants for reducing the capital cost incurred by households (encouraging them to participate in the program) can be disbursed through the same system, and MoF may require SNG contributions to the grant funds. HOAs may elect to pay upfront, thus reducing the ongoing monthly fees. An indicative financing package could be, for example, 50 percent debt 29 (MoF on-lending), 40 percent capital grant (include SNG contributions), and 10 percent down- payment by HOAs. Figure 3.14: Ministry of Finance On-Lending to Subnational Governments Source: Authors. The ZhREO would serve as the implementing agency, carrying out its existing mandate. It would manage the process of planning, procuring, disbursing funds for retrofits based on agreed terms and conditions, and collecting repayments from households. Designs and drawings would be approved by a separate, technical due diligence entity, which provides independent technical review of proposed thermal retrofits from ZhREO. The State Construction Expertise (GosStroiEkspertiza) could possibly fulfill this role. 30 Box 3.1: Existing Approval and Financing Processes for Thermal Retrofits in Residential Buildings in Belarus The process of initiating and getting approval and financing of thermal retrofits for a residential building is fairly complex in Belarus. State Unitary Enterprises of Housing Repair and Maintenance (ZhREOs) are unitary enterprises responsible for maintaining the building stock. They are accountable to sub-national governments (SNGs), but operate as commercial entities. They collect fees from residents for building maintenance and capital repairs, but because these fees are low, ZhREOs receive subsidies from local governments. There are also ZhREOs that are responsible for preparing, and submitting project design documents to introduce thermal retrofit of buildings to the respective authorities for appraisal, review, and approval. At the subnational level, project design documents are submitted to the various unitary enterprises known as “GosStroiEkspertiza” for appraisal. The appraisal process takes up to one month, during which project feasibility is evaluated. Once the project design documents are approved, a list of projects is submitted to Departments of Construction which are part of local executive committees. ZhREO procures services for construction using an official online platform called icetrade.by. The contractor may be a private or public enterprise such as the Directorates of Capital Construction. Residents pay for their share of retrofit cost through monthly payments for housing maintenance and communal services rendered by the ZhREO. Customers would repay the loan portion of the investment through an addition to the monthly service fees they currently pay the ZhREO. The ZhREO would use those funds to repay the loans to SNGs which in turn will forward the payments to MoF. Taking into consideration the ongoing reform of the housing and utility sector, the existing ZhREOs might be transformed to some other form of utility or might fulfill some additional functions. In such case, the financial delivery mechanism remains generally unchanged, only ZhREO will be replaced with a new entity established within the reform process.33 Housing retrofit fund To move to a more stable and dedicated long-term financing platform for residential thermal retrofit, the GoB could consider the creation of a housing retrofit fund (HRF). The HRF can be initially capitalized by government budget and/or IFI loan, and set-up and operated as a capital grant fund or a loan fund. The capital grant fund would aim at directly leveraging commercial bank financing for residential thermal retrofit by subsidizing the capital cost of retrofit thus reducing the principle amount which a HOA needs to borrow. The commercial banks would lend to HOAs at market rates. Such a grant fund is similar to the Thermal Modernization Fund of Poland (Box 3.2). But this approach requires maturity and capacity of HOAs and strong commercial bank involvement, two aspects which still need further development in Belarus. 33 The reform of the system of housing and utility services started in March 1, 2015 with a pilot project in Partizansky and Pervomaisky Districts of Minsk. The key element of the reform is the separation of the administrator and contractor functions of the existing ZhREOs. In Pervomaisky District the existing ZhREO was supplemented by the Housing and Utility Enterprise of Pervomaisky District. Under the new structure, the ZhREO will only perform contractor activities, such as maintaining buildings and facilities, while the Housing and Utility Enterprise of Pervomaisky District will be the administrator who tenders bids and arranges for housing management, major repairs, grounds cleaning, emergency and lift services, solid waste management, fee- based services, and processing of individual requests of the households. 31 Box 3.2: Poland Thermo-Modernization Program Poland introduced a Thermo-Modernization (TM) program in 1998 to finance EE investments in existing non-commercial buildings. The TM program leverages domestic commercial financing by providing a significant subsidy upon completion of eligible projects. Five years after rollout, uptake remained low, so the government streamlined the application process and made grants available earlier, and response to the program improved. The state-owned Bank Gospodarstwa Krajowego (BGK) administers the program and disburses the TM subsidy. Sixteen banks participate by providing loans on commercial terms. The program supports EE investments in residential, non-commercial and public buildings, and district energy networks and providers. Eligible entities are HOAs, cooperatives, individuals, companies, and city and local authorities. Typical measures include insulation, window replacement, installation of thermostatic valves and weather-driven controllers, and water heater upgrades. Once investors identify an EE retrofit project, an energy auditor examines designs appropriate measures. Project proponents then submit the audit report with a combined application for a commercial loan (of up to 80 percent of project costs; see figure) and TM subsidy (up to 20 percent of the loan value) to one of the 16 participating banks, which appraises the loan application, verifies creditworthiness, and confirms eligibility for the subsidy. BGK then reviews the application package and commissions an independent verification of the energy audit. On approval, the borrower executes the EE project, usually through a contractor. Upon project completion, BGK disburses the TM funds to the bank, which applies it to the outstanding loan principal. Banks may also pay contractors directly, although this shifts the burden of procurement oversight to banks, and requires upfront expenditures by contractors, demanding that they have strong financial positions. Funding flows and contractual arrangements in Poland’s TM program Subsidy applications grew from just 144 in 1999, peaked at over 4,200 in 2012, then declined to about 1,500 per year. Of the 32,417 applications received as of March 2014, 30,153 were approved, with total subsidy value around US$533 million, representing 88 percent disbursement and leveraged US$2.56 billion in commercial project financing. Most subsidy applications came from HOAs (54 percent) and housing co-operatives (35 percent). The remainder were from municipalities (5 percent), individuals (4 percent) and social housing associations (2 percent). Most applications (93 percent) were for projects in apartment buildings, and a small number for public utility buildings (4 percent), detached houses (2 percent) and other buildings (1 percent). 32 Source: Based on presentation of Marian Rekiel, Thermo-modernization and Refurbishment Program in Poland, 2014 The loan fund, while being able to still provide capital grants, would mainly aim at shoring up low interest, long-term loans for HOAs. While commercial banks can be part of the scheme (but lending at agreed interest and term), government agencies can be intermediaries as well. Such a loan fund is similar to the housing renovation fund in Lithuania (Box 3.3). This approach could rely more on municipal entities for implementation and can tolerate HOAs without adequate capacity or borrowing legitimacy, thus is considered a more suitable option, at least in the near term, for Belarus. A possible arrangement is depicted in Figure 3.15. Figure 3.15: Potential Arrangements for a Housing Retrofit Loan Fund Source: Authors. Compared with the MoF on-lending scheme, the housing retrofit loan fund is not only a permanent and professionally managed platform for channeling government support for residential thermal retrofit, but also a platform for leveraging the skill and resources of commercial banks and other financial intermediaries. The lower stream of the initial setup of the housing retrofit loan fund looks similar to the MoF on-lending scheme. In the longer-term, HOAs which are able to borrow and implement retrofit projects on their own may choose to directly borrow from participating banks or other financial intermediaries. It is likely that the establishment of the housing retrofit loan fund would require a presidential edict to allow public entities to take on loans. The housing renovation fund in Lithuania is a successful 33 example which combines a financing window and grant component, and subsidies for low income households to increase the uptake of thermal retrofits in residential buildings (Box 3.3).34 34 The housing renovation fund in Lithuania includes a subsidy component for low income households. Low income households are wholly subsidized and do not need to pay for retrofit costs. However, if low income households refuse the retrofit, they also receive a penalty in the form of reduced heat subsidies. 34 Box 3.3: Housing Renovation Fund in Lithuania The housing renovation fund is a dedicated fund that provides capital for long-term and low interest loans to finance EE investments in apartment buildings. It is complimented by additional grant financing for project preparation and capital subsidies for households. Established in 2009, the fund received an initial injection of EUR 100 million from the national budget and EUR 127 million from European Regional Development Fund (ERDF) as part of the Joint European Support for Sustainable Investment in City Areas (JESSICA) initiative.35 These funds are allocated to the Housing Energy Saving Agency (HESA) and Ministry of Environment which serve as the managing authorities of the funds. A holding fund managed by the European Investment Bank (EIB) is responsible for disbursement and administration of credits to renovation project owners (HOAs, apartment owners, buildings administrators, or municipal entities) further directs funds to Urban Development Funds (UDF), or financial intermediaries which are selected commercial banks or public institutions. In parallel, state grants and subsidies are available to borrowers for EE projects that meet specific energy performance standards. Low income households are wholly subsidized, and do not have to pay for preparation and renovation costs. Conversely, low-income households that oppose the renovations face the reduction of heat subsidy as a penalty. The loans have an interest rate of 3 percent, and term of 10 – 20 years. They are repaid through building administrators out of the savings residents make on heating payments, which are collected by the mechanism of the monthly building administration and communal services fee. If apartment owner is borrower, owner makes repayment to the UDF. If an implementation agency is borrower, apartment owners make an upgrading payment to the agency, who then makes repayment to the UDF. To account for the lender’s lack of capacity, technical assistance with the preparation of technical documentation is provided. Source: ESMAP, Case Study on the Residential EE Program in Lithuania, prepared by Viktoras Sirvydis, 2014. 35 The JESSCIA initiative is a financing mechanism which was developed by the European Union Commission and European 35 3.5 A Roadmap for Scaling Up Thermal Retrofit of Residential Buildings The two financing and delivery options identified in Section 3.4 could provide a feasible framework for scaling up thermal retrofits in Belarus through debt financing given existing administrative arrangements. Both would help increase the transparency of government assistance, accountability of key stakeholders, and the capacity of service providers. This would hasten the transition to a residential thermal retrofit regime that is primarily driven by private investments through commercial financing. Such a transition requires a number of legal and regulatory changes, critical among them a transition to cost-recovery heat tariffs, giving households the ability to control their heat consumption, and consumption based-billing at the apartment level. Another priority is giving homeowners the ability to borrow collectively through HOAs for thermal retrofits.. Pilots will need to be carried out to test and put in place an effective financing and delivery system, including an appropriate subsidy mechanism, proper procurement and contractual arrangements for a large scale retrofit program, and quality and performance assurance. The most important barriers, and possible solutions, are summarized in Table 3.4. The principal activities to be undertaken in the next five years are illustrated in a stylized roadmap in Figure 3.16. Investment Bank to promote sustainable urban development in EU countries, for example EE investments or other investments in urban infrastructure. It is funded through the ERDF, which provides loans at low interest rates to some EU members. See: http://ec.europa.eu/regional_policy/en/funding/special-support-instruments/jessica/ 36 Table 3.4: Solutions to the Main Barriers to Residential Thermal Retrofit Category of Barrier Solutions Incentive-related  Tariff increases to cost recovery levels as planned already by the government  Installation of TRVs to enable households to control heat consumption  Installation of HCAs to enable apartment-level consumption- based billing  Introduce system of consumption based billing alongside installation of TRVs and heat allocators  Improvement of modern automated building level heat control systems (potential options include building-level heat substations, which also improves efficiency and service quality of domestic hot water supply)  Launch extensive informational campaign, explaining consumption based billing system and benefits of energy efficiency. Financing  Government facilitation of debt financing supported by long- term, low cost capital 36  Capital grant subsidies to incentivize households and HOAs to invest in deep thermal retrofit  Create conditions for commercial banks to enter the thermal retrofit market Implementation  Government can demonstrate the growth potential of EE retrofit market by supporting pilot projects and publishing energy savings data  Government support can demonstrate viable delivery models  Develop standard documents and guides (audit and tender templates, loan applications, energy calculators, HOA registration) to simplify implementation  Support development of HOAs and their capacity Source: Authors. 36 Many ESMs have long payback periods, upwards of 10 years. Commercial financing typically only offer loans with much shorter pay-back periods. Mechanisms to extend loan tenors can be as important as grants to reduce investment costs. 37 Figure 3.16: Roadmap for Scaling up Deep Thermal Retrofit of Residential Buildings Source: Authors. Efforts for scaling up deep thermal retrofit of pre-1996 residential buildings begin with the implementation of the government’s tariff reform plan which aims at achieving full cost recovery in 2020. Consumption-based billing at the apartment-level should be introduced parallel to increases in tariff levels, improvements to social assistance programs, and implementation of informational campaigns. Investments in TRVs and HCAs should be made through a national program. The cost- effectiveness of such investments have been widely proven in countries where cost recovery heat tariffs are in place, but an in-depth assessment should be carried out to help develop a clear strategy and approach. The national program could begin with a pilot phase and could be expanded nationwide after three years. Investments in building-level substations may also be appropriate for some buildings (e.g., those with radiators embedded inside the walls). These investment measures will allow consumers to see how individual consumption habits impact heating bills, and to adjust their behavior accordingly. Expenditures in residential energy subsidies could be shifted to investments in energy efficiency and more effective social assistance to help households cope with tariff increases (Box 3.4).37 When apartment-level consumption-based billing is in place, a policy of cost recovery tariffs will be easier to implement as customers are able to scale back consumption based on their ability and willingness to pay for heat at a higher tariff rate. International experience indicates that fast-paced tariff reform coupled with the broad introduction of consumption-based billing and investment in TRVs and HCAs is feasible and can bring visible evidence of reform benefits (Box 3.5). This requires extensive informational 37 Caterina Ruggeri Laderchi, Anne Olivier, and Chris Trimble, “Balancing Act: Cutting Energy Subsidies While Protecting Affordability”, Washington, DC: World Bank, 2013. 38 campaigns for consumers on both a national and DH utility level, explaining the benefits of consumption based billing, energy efficiency, and tariff reform to homeowners.38 To help households cope with tariff increases, reform should be supported by an expansion of the GoB’s Targeted Social Assistance Program and possible reintroduction and refinement of the Housing and Utility subsidies program.39 With consumption-based billing in place, and tariffs at cost-recovery levels, consumers will have stronger financial incentive to undertake thermal retrofits. These retrofits will also have a dramatic effect on improving level of comfort, and reducing moisture build-up on walls during the winter months. Concessional lending and grant funding will still be necessary and could be implemented through either of the options previously discussed. Concessional financing will, in particular, be important to incentivize investments where payback periods are longer than the typical terms of commercial loans.40 However, the need for concessional financing could be reduced over time (i) as commercial lenders begin to enter the market; (ii) as tariffs are increased, reducing payback periods; and (iii) as income growth drives households demand and affordability for investment in improved housing and thermal comfort conditions. 38 A recent focus group discussion and stakeholder analysis conducted as part of the World Bank’s Belarus Heat Tariff and Reform and Social Impact Mitigation Study found that insufficient interaction between DH service providers and consumers contributed to a lack of trust and understanding. 39 World Bank, “Heat Tariff Reform and Social Impact Mitigation: Recommendations for a Sustainable District Heating Sector in Belarus”, 2014. 40 Eligibility criteria for grant and concessional financing can be determined during the piloting phase. These criteria will likely be based on a demonstrated minimum energy efficiency threshold or specific heat consumption achieved after retrofits. 39 Box 3.4: An Integrated Strategy for Improving Fiscal Sustainability While Ensuring Affordability An integrated strategy is required to ensure the affordability of energy for the vulnerable groups while increasing tariffs to cost-recovery levels. This involves introducing or revising measures and programs that support low-income customers while offering incentives for all households to better manage their energy consumption. According to World Bank estimates, countries in the Europe and Central Asia (ECA) region stand to save 0.5 to 1 percent of GDP by putting in place a comprehensive strategy. Common measures to mitigate the impact of tariff increases on low-income households in the ECA region have included lifeline tariffs and transfer programs, which can either be earmarked for energy consumption or non-earmarked. Since the beginning of the global economic crisis in 2008, a number of countries have introduced important reforms in social assistance systems to increase their effectiveness including strengthening the targeting of the programs and moving away from some of the categorical benefits. For example, in Romania, recent changes in the eligibility criteria for district heating subsidies were introduced to ensure that the subsidy program could better cushion the impact of the removal of central subsidies for district heating producers. Efforts have been put in place to create more transparent and accountable systems. These efforts also cut down on the bureaucratic requirements that can make it difficult for low-income households to apply for the benefits. Such efforts should help create a unified registry of beneficiaries and consolidate the many small programs that are part of the overall social assistance system. In Belarus, the GoB could expand the Public Targeted Social Assistance Program (GASP) and reintroduce the housing and utilities (H&U) program. To expand the GASP program, GoB could consider extending the payment period from six months to a year, raise the income eligibility threshold and increase government funds dedicated to this program. If the GoB re-introduces the H&U program, it could incorporate a refined income test to determine eligibility and to differentiate benefit payments based on income levels. For example, the expenditure thresholds above which households are eligible to receive subsidies should be higher for higher-income households and lower for poorer households. The study Heat Tariff Reform and Social Impact Mitigation: Recommendations for a Sustainable District Heating Sector in Belarus estimates the fiscal cost and improved targeting efficiency of expanding GASP and reintroducing the H&U program (Appendix K). The second pillar of the integrated strategy involves efforts to reduce residential energy demand, including: (i) developing energy efficiency strategies and implementing energy efficiency programs; (ii) disseminating information to assist users; (iii) comprehensive planning to address all issues; (iv) offering grants and funds; (v) developing and updating building standards; and (vi) helping owners and renters implement energy efficiency measures in buildings. Moreover, while changes in laws and regulations can be undertaken quickly, changes in behavior are slow. Specific measures, such as introducing smart metering and certificate programs, can help because they allow households to make informed decisions. Finally, because putting in place effective measures to help households adapt and cope with higher energy tariffs is going to require time, countries should assess the temporary or transitional measures that might be needed to avoid sharp shocks that would make it difficult for households to cope. Source: Caterina Ruggeri Laderchi, Anne Olivier, and Chris Trimble, “Balancing Act: Cutting Energy Subsidies While Protecting Affordability”, Washington, DC: World Bank, 2013. World Bank, “Heat Tariff Reform and Social Impact Mitigation: Recommendations for a Sustainable District Heating Sector in Belarus”, 2014. 40 Box 3.5: Heat Metering and Billing Reforms Unlock Adoption of EE in Buildings: Poland’s Experience With partial support from a World Bank loan, four Polish cities of Warsaw, Krakow, Gdansk, and Gdynia renovated their heat supply systems. From 1991 to 1999, building-level heat meters were installed in existing buildings and heat tariff reform was introduced. The existing heat tariff charged at the building level was changed to a square-meter basis. During this time, the Government of Poland introduced additional measures to increase households’ responsibility to pay for delivered heat, thereby stimulating more-efficient use of heat. Households (or companies acting as their agents) invested in radiator valves (TRVs), heat allocation meters, better windows, and insulation. While building piping systems generally remained unchanged—single-pipe vertical systems are still in place— radiator bypass pipes were added where needed. Overall, the per m2 cost of heating fell by 55 percent owing to consumers’ efficiency measures, and to technical, operational and management improvements by heat supply companies, mitigating the impact of subsidy removal. Results in Four Cities 1991-1992 1999 Change Household heat bill subsidy (%) 67 <5 (1994) -93% Heat bill charged to households (1999 US$/m2) 13.7 6.2 -55% 2 Heated floor area (million m ) 63.8 68.6 +7% Heat energy sold (Gcal/m2) 0.27 0.22 -18% Energy savings 22% Nationwide, household heat subsidies provided by municipal governments were eliminated by the end of 1997 from 78 percent of the cost of service in 1991. Installation of building- level heat meters has been mandatory since 1999. A total of 5.5 million heat allocation meters—to assign heating costs among units—were installed as of 1997, covering about 30 percent of dwellings nationwide (apartment-level heat meters are significantly more expensive). Projects often required water quality improvements to ensure that meter installations were effective. More than ten companies have competed for billing services, including allocation meter installation, meter reading, billing and maintenance. Energy savings stemming from the reform and reflected in customer heat bills typically range from 20 to 40 percent. Poland’s end-use demand for heat energy fell, but similar measures may not have that same impact in other countries as heating levels in Polish apartments were generally adequate before the reforms, such that post-reform service levels were approximately the same. Elsewhere, such as in Lithuania, apartments tend to be under-heated, so energy efficiency gains may be harvested more in terms of improved comfort level instead of energy savings (decrease in overall demand). It is possible that residential sector heat demand could stay at roughly the same level while meeting substantial latent demand for energy services— achieving a significant development impact with no net increase in primary energy consumption. Source: World Bank, Implementation Completion Report for a Heat Supply Restructuring Project, Report No.20394, June 2000 41 4 Financing and Delivery of EE in Public Buildings The public building stock, like the residential building stock, consists of mostly pre-1996 buildings with poor energy performance. Recently constructed public buildings have substantially better energy performance than those built before 1996. Section 4.1 describes the characteristics and performance of the public building stock, with a focus on educational, health and administrative buildings. Section 4.2 analyzes the technical, financial and economic potential of selected energy savings measures that could be implemented. Section 4.3 identifies barriers to EE in the public sector. Section 4.4 presents potential options for financing EE improvements. Section 4.5 concludes with a roadmap for scaling up EE in public buildings in Belarus. 4.1 Characteristics of the Public Building Stock More than 90 percent of public buildings in Belarus were built before 1996, including 95 percent of kindergartens and secondary schools, nearly 100 percent of polyclinics, and 98 percent of administrative buildings (Figure 4.1). Thermal retrofits in these buildings could result in substantial energy savings. Figure 4.1: Typology of Public Buildings Built Before 1996 3 Note: In Belarus, energy performance of public buildings is measured in terms of volume (kWh/m ) instead of area 2 (kWh/m ) as in residential buildings. Source: Authors based on data from SNB 4.02.01-03. The GoB began work to improve the EE of the public building stock many years ago (e.g. Council of Ministers’ Decree # 1820 ‘On Additional Measures for Efficient Use of Fuel and Energy Resources’ in 2003, to equip all public buildings with heat and water meters and systems of heat energy regulation). The work has included close collaboration with the IFIs. Box 4.1 42 includes information about two such World Bank projects implemented jointly with the Energy Efficiency Department, Ministry of Energy and Oblast Executive Committees. Box 4.1: World Bank Investment Projects aiming at Increasing EE in Public Buildings Post-Chernobyl Recovery Project (2006-2013), USD80 million investment The project provided the population residing in the Chernobyl-affected area with energy- efficient and reliable heat and hot water services. Implemented in the three most affected oblasts: Brest, Gomel, and Mogiliev, the project addressed such immediate problems as (i) replacement of inefficient old boilers and heat distribution systems, (ii) installation of new windows, (iii) improvement of lighting and insulation in social institutions such as schools, hospitals, and orphanages, and (iv) restoration of essential heat and hot water services to social institutions that were receiving less than adequate services. Investments in residential gas connections provided clean and improved space heating to households that were burning wood inside homes with negative environmental and health consequences. The project improved energy service for 246,000 students, teachers, patients, and medical staff; 4,600 individual houses previously burning wood for heating were converted to reliable gas heating; 376 buildings were rehabilitated with improved lighting and/or upgraded windows; and 32 boilers were renovated. The measures resulted in annual savings of about 180,000 MWhs of heat energy and 15,800 MWhs of electricity. The economic internal rates of return evaluated at the completion of the project ranged from 18 to 31 percent, indicating substantial value for money. Social Infrastructure Retrofitting Project (2001-2010), USD37.6 million investment The project aimed at improving the social sector facilities, with particular emphasis on reducing energy consumption, encouraging a more effective use of resources, and reducing operation and maintenance costs in schools, medical and other selected social facilities such as orphanages and community homes for the elderly and disabled. A total of 207,100 students, teachers, patients and medical staff benefitted from better facilities, including better thermal comfort and lighting conditions. Some 745 social sector buildings were retrofitted with energy efficiency improvements, 300 educational facilities received lighting improvements, 42 boiler houses and 541 heat substations were renovated. Energy consumption in the improved facilities was significantly reduced. Total annual saving of fuel and energy resources amounts to 243,300 MWh per year. 4.1.1 Educational Buildings In 2013, Belarus has 7,926 educational institutions, including preschool, general secondary, vocational technical, special secondary and higher education establishments, attended by 1,946,000 students. Assuming that the educational institution is located in at least one building, the above number can be interpreted as the number of buildings of educational institutions in the first approximation. These can be further broken down by type of school. Kindergartens make up 28 percent of all educational buildings, while secondary schools make up another 33 percent. Since the other building types either have few buildings, few students, or both, they are not further considered in this analysis. Roughly 55 percent of secondary schools are in rural areas, and 45 percent are in urban areas. (Figure 4.2). 43 Figure 4.2: Overview of Educational Building Stock Source: Authors’ estimates. 44 Annual energy consumption for heating in secondary schools and kindergartens differs by construction period. The total annual consumption for heating differs across construction periods and construction materials used (Figure 4.3). Schools and kindergartens built before 1996 have substantially higher consumption than those built in later periods, and therefore have considerable energy savings potential. Figure 4.3: Annual Heat Consumption in Schools by Period of Construction (kWh/m 3) Note: The small deviation in specific heat consumption in buildings built after 2011 is due to changes in the approach to standardization of rated values. Source: Authors based on SNB 4.02.01-03 and TCP 45-2.04-196-2010. Because of a lack of available data, the breakdown on the number of secondary schools and kindergartens built in different periods must be estimated based on new student numbers and known new school construction. As of 2013, there were 2,645 secondary schools and 2,236 kindergartens in Belarus. Since 2000, new construction of kindergartens has provided room for an additional 991 kindergarten students each year, on average. Over the same period, new secondary schools provided room for an additional 6,408 students per year, on average. Taking into account the average number of students per school allows a calculation of how many new schools must have been built since 2000 (Table 4.1). 45 Table 4.1: Estimates of Secondary Schools and Kindergartens Built before 1996 Estimated number Number Estimated number % of total built School type schools built, 2000- in 2013 schools, pre-1996 before 1996 2013 Urban secondary 1,200 75 1,125 94% schools Rural secondary 1,445 92 1,353 94% schools Kindergartens 2,236 95 2,141 96% Total 4,881 262 4,619 95% Source: Authors. There have been an estimated 167 new secondary schools and 95 new kindergartens built since 1996. That leaves 2,479 (about 94 percent) secondary schools built before 1996. Pre-1996 secondary schools can be further divided into 1,125 urban and 1,353 rural schools. For kindergartens, 2,236 (about 96 percent) were built before 1996. 4.1.2 Health Buildings There is no publicly available statistical data on healthcare buildings in Belarus. Energy saving potential was thus estimated using the number of healthcare organizations and healthcare building design standards. The two relevant energy typologies of health care organizations are inpatient clinics, where patients can stay overnight, and outpatient polyclinics, where patients come only for visits. As of 2000, there were 830 inpatient clinics in Belarus and 1,843 outpatient polyclinics (Figure 4.4). The Ministry of Health has designated about 10 percent of healthcare buildings for top priority renovation. 46 Figure 4.4: Proportion of Healthcare Organizations in Belarus, 2000 Source: Authors, based on data from Republic of Belarus Statistical Yearbook, Minsk 2014. It can be assumed that the number of outpatient polyclinics organizations equals the number of polyclinic buildings. However, inpatient clinic organizations often occupy several buildings, and it is not possible to accurately estimate the total number of buildings they occupy. Therefore, only outpatient polyclinics are considered for further analysis. In addition to making up the majority of healthcare organizations, outpatient polyclinics are also evenly distributed among the regions of Belarus, with every region containing between 12 and 16 percent of the nation’s outpatient polyclinic organizations (Figure 4.5). The number of outpatient polyclinic buildings analyzed for savings potential is 1,718, after removing those outpatient polyclinics with very small capacity (fewer than 460 outpatient visits per shift). This leaves a total heated area for outpatient polyclinics of 6,633,000 m2 (or a total heated volume of 21,623,000 m3) in need of thermal renovation. 47 Figure 4.5: Regional Distribution of Outpatient Polyclinic Organizations Source: Authors, based on Republic of Belarus Statistical Yearbook, Minsk, 2014. Heat consumption in outpatient polyclinic buildings differs across construction periods and building materials. Outpatient polyclinics built before 1996 have substantially higher heat consumption than those built in later periods, and therefore have considerable energy savings potential (Figure 4.6) Figure 4.6: Heat Consumption Standards in Outpatient Polyclinics by Construction Period Source: Authors, based on data SNB 4.02.01-03 and TCP 45-2.04-196-2010. 48 Because the estimate for the number of outpatient polyclinic buildings is based on data from 2000, it can be assumed that the vast majority of outpatient polyclinic buildings would have been built before 1996. 4.1.3 Administrative Buildings There are no publicly available statistical data on administrative buildings in Belarus. The total area of administrative buildings can be estimated based on the number of administrative workers in various economic sectors as well as design standards for selected administrative buildings. Analysis of building design documentation suggests an area of 8.15 m 2 per worker. It can be estimated that this “worker area” per building is about 65 percent of the total heated area for each building. These estimates result in a total heated area for administrative buildings of 9,619,000 m2 (Table 4.2). Table 4.2: Estimated Heated Area of Administrative Buildings Number of administrative Total "worker area" Total heated area Economic Sector workers (thou.) (thou. m2) (thou. m2) Industry 103.7 850.3 1308 Construction 0.54 4.4 7 Trade 48.8 400.2 616 Public Catering 79.6 652.7 1004 Public Agencies 68 558 859 Small Organizations 462 3786 5825 Total 762.64 6,251.57 9,619 Source: Authors based on data from Republic of Belarus Statistical Yearbook, Minsk, 2014. It is estimated that about 98 percent of all administrative heated area was constructed before 1996. This leaves a total of 9,485,000 m2 of heated area (or 31,490,000 m3 of heated volume) in need of thermal retrofit, corresponding to 1,841 administrative buildings. 4.2 Costs and Benefits of EE Improvements The energy savings potential for pre-1996 educational, health and administrative buildings is substantial. The packages of ESMs that are most suitable for public buildings are the same as those for residential buildings described in Section 3.2, with the exception that HCAs are not necessary in public buildings. The relative savings potential for each package is different, however:  End-user Heat Control: For public buildings this includes only TRVs. This package could result in about 5 to 9 percent energy savings, depending on the building type and sector. 49  Simple thermal retrofit: Window replacement could result in additional 11 to 13 percent energy savings, depending on the building type. The Simple Renovation package could result in a total of about 17 to 20 percent energy savings.  Deep thermal retrofit: Insulation of walls and roofs could result in additional 36 to 38 percent energy savings, depending on the building type. The Deep Renovation package could result in a total of about 52 percent energy savings. The method for determining the potential energy savings is the same as for residential buildings. Baseline energy consumption values (in kWh/m3) were estimated for each building type, and multiplied by the building types’ total heated volume to calculate total annual consumption. Relative savings from each ESM package were estimated for each building type. This methodology allows for the calculation of the potential annual energy savings (in GWh) of each package, the capital expenditure (CAPEX, in USD) required to implement each package, and payback periods at current tariffs. For customers connected to the DH system of Ministry of Energy tariffs are about USD 49 per Gcal, or USD 0.04213 per kWh. Customers served by the Ministry of Housing and Utilities pay about USD 90 per Gcal, or USD 0.07739 per kWh. Educational buildings have the greatest potential annual savings (2,030 GWh for Deep Thermal Retrofit), but also require the greatest investment (about USD 1.5 billion for Deep Thermal Retrofit). Payback periods using cost-recovery levels are reasonable, and are better for Deep Thermal Retrofit than for Simple Thermal Retrofit. Table 4.3 shows the results of the analysis and shows the present value of the energy savings as a percentage of Belarus’ GDP in 2013. 50 Table 4.3: Summary of Savings Potential and Investment Costs, by Package and Public Building Type Payback period, Payback period, at current tariff Total at current tariff PV of savings, Annual energy (DH system of Package Building Type investment (DH system of as % GDP savings, GWh the Ministry of (million USD) Ministry of (2013) Housing and Energy) Utilities) Educational 363 $ 28.72 2 years 1 year 0.15% –End-User Heat Control Health 122 $ 13.81 3 years 1 year 0.05% Administrative 75 $ 19.73 6 years 3 years 0.06% Educational 771 $ 625.28 20 years 10 years 0.25% –Simple Thermal Retrofit Health 262 $ 225.94 21 years 11 years 0.08% Administrative 260 $ 323.06 30 years 16 years 0.08% Educational 2,030 $ 1,471.40 18 years 9 years 0.64% –Deep Thermal Retrofit Health 686 $ 523.83 19 years 10 years 0.22% Administrative 801 $ 733.37 22 years 12 years 0.25% Note: Simple and Deep Renovation both include twice the cost of TRVs, as they must be replaced after 10 years. See Appendix C for case studies of buildings that have already received thermal retrofits. Energy audit and design costs are not included in the investments. A rule-of-thumb estimate of such costs is about 10 percent of CAPEX. Including these costs would increase the simple payback period by about 1 year. Source: Authors. 51 Supply curves were made for the public building stock in the same manner as for the residential stock. In the supply curves that follow, the black horizontal line represents the current tariff of DH systems of the Ministry of Energy (MoE), and the green horizontal line – tariffs of smaller DH systems of the Ministry of Housing and Utilities (MHU). Most of the assumptions for the supply curves below are the same as for residential buildings, with the exception of the discount rate used (see Table 4.4). Table 4.4: Key Assumptions for Supply Curve Analysis in Public Buildings Parameter Assumption Discount rate 12.45% (based on Government of Belarus 1-year bond yield as of June 2015) Asset life 20 years for insulation and windows 10 years for TRVs Construction period 1 year Tariff of DH systems of the Ministry of 0.04213 USD/kWh (49 USD/Gcal) Energy Preliminary tariff of DH systems of the 0.07739 USD/kWh (90 USD/Gcal) Ministry of Housing and Utilities (natural gas) Source: Authors. At MoE tariffs, End-User Heat Control is financially viable for educational and health buildings (their levelized energy costs are below the black line representing the MoE tariff), but not for administrative buildings. At the MHU tariff, the package is viable for all building types, as each building type’s levelized energy cost is below the green line representing the MHU tariff (Figure 4.7). 52 Figure 4.7: Levelized Energy Cost of End-User Heat Control, Public Buildings Source: Authors. Neither Simple Thermal Retrofit nor Deep Thermal Retrofit is financially viable, as the levelized cost for each type of building exceeds even the higher tariff of small DH systems of the Ministry of Housing and Utilities (Figure 4.8 and Figure 4.9). 53 Figure 4.8: Levelized Energy Cost of Simple Renovation, Public Buildings Source: Authors. 54 Figure 4.9: Levelized Energy Cost of Deep Renovation, Public Buildings Source: Authors. However, with low-cost financing (about a two percent interest rate) obtainable from government and donors, Deep Renovation could become financially viable. No additional capital subsidy would be necessary (Figure 4.10). 55 Figure 4.10: Levelized Energy Cost of Deep Renovation with Low-Cost Financing, Public Buildings Source: Authors. 4.3 Barriers to EE in Public Buildings Barriers to EE in public buildings in Belarus fall into the following categories: legal, regulatory and institutional, incentive-related, and financing. The barriers are described in more detail below. Legal Regulatory, and Institutional  Inability to reallocate expenditure between line items. Annual budget appropriations are broken down on a quarterly basis into very detailed line-items. These limits are entered into the Treasury system and become hard cash controls. This means that the amount set aside in a budgetary organization’s budget to pay energy bills (measured, for example, in cost per liter, cubic meter, ton or kWh of purchased energy) cannot be used for other purposes (for example, a reserve fund to pay for investments in EE). Under the current budget rules, any savings from operating expenses cannot be shifted to capital expenses, and vice versa. Several 56 public sector stakeholders interviewed as part of this study indicated that they would like to be able to use energy savings to pay for thermal retrofits (Appendix I).  Restrictions on multi-year obligations. Article 138 of the Budget Code prohibits any commitments beyond the approved annual appropriations. The restriction on multi- year obligations stifle the evolution of organizations like ESCOs, or companies providing ESCO-like functions, which could help public organizations save on energy consumption. To get around this restriction, administrators of budget funds typically try to ensure that their medium- to long-term projects are supported by an act of the Council of Ministers or the Presidential Decree.  Highly fragmented responsibilities for certain sectors. This fragmentation makes coordination of bundled procurement and investment in EE improvements in the public sector more complex. In the education and health sectors, there are many levels of government responsible for financing expenditures of schools and hospitals. Different levels of government are responsible for different types of institutions. For example, expenditures of post graduate schools are financed by the Republic budget while expenditures for lower level educational institutions such as pre-schools might be financed by oblast and base tier budgets. Incentive-related  Inability to retain savings on energy. Budgetary organizations in Belarus use incremental, line-item budgeting that tend to limit budgetary organizations’ incentives to save energy. This traditional type of public sector budgeting, while widely used throughout the world, also leads to a “use it or lose it” mentality in which public officials feel compelled to spend all that was budgeted under a particular line item to ensure that their budgets are not reduced in the next planning period.  “Mutual settlement” and other inter-governmental transfers. The system of transfers between levels of government creates little incentive for SNGs to reduce operating expenditures and generate permanent fiscal savings. Approximately 35 percent of the budget for subnational governments is sourced by transfers from the central government, three-fourths of which being general purpose grants. These transfers fill the gap between tax revenues of SNGs and their expenditures, removing an incentive for SNGs to reduce their operational expenditure (OPEX). Additionally, “mutual settlement” transfers are allocated in the course of the fiscal year by oblast governments to cities and raions for emergency expenditures. The size of these largely discretionary grants suggests that they are used to finance regular rather than exceptional expenditures, further reducing the incentive for cities and raions to reduce expenditures. Financing barriers Article 79 of the Budget Code forbids public entities from borrowing in any form. However, SNGs may issue securities on the domestic market or may take intergovernmental loans to finance in-year cash shortfalls or implement investment projects. Public enterprises may 57 borrow from commercial banks, using their assets as collateral, but such permissions are granted by the Government (owner of public enterprise) only on a limited basis. 4.4 Options for Financing and Delivery International and regional experience financing of EE improvements in public buildings indicates several options for facilitating scale up of EE investment. These are summarized in Table 4.5 and described in detail in Appendix E. The arrangements most suitable for Belarus described below—budget capture, Super Energy Service Company (ESCO), and Energy Efficiency Revolving Fund (EERF)—reflect a progression in market development. Budget capture, at one end of the spectrum is a relatively simple mechanism, implementable with limited legal, regulatory and institutional changes. EERFs, at the other end of the spectrum, have features of budget capture and Super ESCOs. EERFs requires more preparation and change than a simple budget capture mechanism, but are more scalable and can leverage commercial financing in the longer-term. 58 Table 4.5: Summary of Possible Investment Mechanisms in the Public Sector41 Option Pros Cons Grants Builds market capacity, easy to implement, can Not sustainable/scalable, relies on limited Public budget, IFI/ donor funds provided to directly finance municipalities grant resources public entities to cover 100% of EE project costs Budgets/ Grants w/ co-financing Builds market capacity, easy to implement, can Not sustainable or scalable, relies on limited Partial budget support/grants with some directly finance municipalities that may not be grant funds co-financing (loans, equity) from public able to borrow, co-financing increases ownership entities MOF financing w/ budget capture Builds market capacity, relatively easy to Requires MOF to allocate substantial budget Budget financing to public implement, can directly finance municipalities for financing, sustainability relies on MOF PIU, agencies/municipalities, with repayment that are not able to borrow, could allow funds to scale relies on PIU and borrower capacities, through reduced future budgetary outlays revolve (if MOF reinvests reflows), no repayment reducing future budget provisions can be risks complex Utility (on-bill) financing Streamlined repayments, lower repayment risk if Requires changes in utility regulations and Utility borrows and finances EE risk of utility disconnection, builds off of utility billing systems, creates potential for investments in public clients; recovers relationships and services, can be done on a monopolistic behaviors, financing competes investments through customers’ utility bills sustainable and scalable basis with local banks, may be easier for power utilities than heating ones EE revolving funds Builds market capacity, can directly finance Recovering operating costs in early years is Independent, publicly-owned entity municipalities that are not able to borrow, can difficult, using private fund manager to provides financing for EE to public clients, better leverage funds by pooling, greater oversee public funds may not be politically repayments based on estimated energy potential for bundling of projects and desirable, heavy reliance on good fund cost savings development of simple ESCOs, centralized manager, need mechanisms to help ensure implementation and procurement can lower public client repayment, fund can act costs, can recover operating costs through fees monopolistic 41 This table is a shortened version of the options presented in Appendix E. “Western Balkans: Scaling Up Energy Efficiency in Buildings.” 2013. The World Bank Group. 59 Option Pros Cons Super ESCO Builds ESCO market capacity through Super ESCO can be monopolistic and may be Publicly owned company that provides subcontracting, helps address public subject to public sector bureaucracies financing for EE projects with public procurement and financing issues, centralized (procurement, staffing, budgeting), entities with repayments based on energy implementation and procurement can lower appropriate exit strategy may be needed if cost savings costs, greater potential for bundling of projects private ESCO/ESPs enter the market, super and development of simple ESCOs models ESCO requires access to long-term financing Credit line with municipal (development) Builds commercial lending market by Relies on strong banking partner with bank demonstrating public agencies can repay, allows incentive and ability to proactively develop Dedicated municipal bank lending to public public agencies to undertake own pipeline and offer good financial products, agencies for EE, using government or IFI procurement/implementation which can allow serves only creditworthy municipalities, some funds for greater scale, allows for lower interest rates, municipal banks do not do proper risk funds can revolve (if bank relends reflows for EE) assessments and appraisals or take risks making it more sustainable Credit line with commercial bank(s) Builds capacity of commercial banks to market Relies on strong banking partner with Selected commercial bank(s) lending to and appraise EE projects, mobilizes commercial incentive and ability to proactively develop public agencies for EE, using government financing which can deliver scale and be pipeline and offer good financial products, or IFI funds, or purchase of account sustainable, allows public agencies to undertake serves only creditworthy municipalities able to receivables from private ESCOs (i.e., own procurement/implementation borrow, requires complementary TA to work factoring) well, EE investments have to compete with other investment for limited capital, some credit lines distort the market Partial credit guarantee Allows banks to expand their potential customer Relies on network of strong banking partners Risk-sharing facility that can offer partial base, mobilizes commercial financing which can with ability to proactively develop pipeline and coverage to commercial lenders from EE deliver scale and be sustainable, can allow more assume some risks, partial risk coverage may loan defaults banks to participate thereby increasing only allow lending to a few additional competition, can help address municipalities, can create moral hazard overcollateralization/short tenor issues, allows depending on risk coverage public agencies to undertake own procurement/ implementation 60 Budget Capture Mechanism A “budget capture” mechanism allows a public entity to retain energy cost savings, and to use those savings to service debt on investments in retrofits. Under this scheme, financing is provided by a government agency, such as MoF, using a combination of government budget allocations and IFI or donor funds. This funding covers the investment costs of the EE projects in public buildings and facilities of municipal governments. The recipient “repays” the funds using the savings generated by the investment project in the form of reduced energy bills in future years. The size of the reduced outlay is usually based on the amount of energy cost savings. The flow of funds to pay for EE improvements follows the same flow as the normal appropriations from the MOF. The repayment to MOF could be complete (all cost savings) or partial (a portion of cost savings). The partial approach encourages public agencies to participate in the program because they retain a share of the savings achieved. Figure 4.11: Budget Capture Principle – After Retrofit *Could also include payback of amounts saved on energy as a result of the retrofit. Either approach may require some changes to the budget code. Source: Authors. In the case of Belarus, the MoF would provide special funds to the Oblast Executive Committee or a public entity, which then pays for the EE retrofit (Figure 4.11). The retrofit may be done by ZhREO or private contractors. Implementing budget capture in Belarus would require changes to the Budget Law. Funds available to SNGs and public entities for energy payments are approved during the annual budget process, based on the past year’s energy consumption, current energy prices and expected inflation (Box 4.2). As noted in Section 4.3, the budget allocation is strictly earmarked for energy; it cannot be reallocated to other budget line items. 61 Box 4.2: How Public Entities in Belarus Pay Energy Bills Public entities and SNGs in Belarus currently i) pay for energy directly or ii) pay through the SNG’s Executive Committee. Public entities with their own accounting units will pay for energy directly and will typically agree on a new contract with the utility each year (left most panel of the figure below). Public entities that do not have their own accounting units will have contracts with the utility through, and have their bills paid by, the subnational government department to which the public entity reports (rightmost panel of the figure below). Depending on the payment arrangement, the utility may invoice for actual consumption or request an advance payment, which is followed by a settlement at the end of the month based on the public entities’ actual consumption. The public entity forwards payment instructions to the treasury which dispenses the funds to the utility.42 Budget Capture Principle – Existing Arrangement Source: Authors. A budget capture mechanism was used in Macedonia as part of the World Bank’s Municipal Services Improvement Project (MSIP) (Box 4.3). 42 The treasury system in Belarus has various units at the republican, oblast and local government levels that execute operations such as accounting and processing payments in accordance with republican, oblast and local budgets. For example, the treasury unit at the local level will process an invoice from a heat utility to a local level public entity. 62 Box 4.3: Budget Capture Mechanism for Municipal Services Improvements in Macedonia Begun in August 2009, the MSIP aims to improve transparency, financial sustainability and delivery of targeted municipal services in Macedonia. The project is financed by a World Bank loan to the government, which the Ministry of Finance (MoF) then lends to eligible municipalities and public sector entities based on municipal investment proposals. Investments are focused on municipal services projects that generate revenue and/or reduce costs, including EE in public buildings and street lighting. Municipalities repay the loans through from revenues or cost savings generated by the investments. Repayments can either be made separately or by reconciling future budgetary outlays, thereby allowing MOF to “capture” the repayments through the budget system. This essentially eliminates all repayment risk. In addition, the project supports local capacity building through a Project Implementation Unit (PIU) in the MOF. The PIU funds technical assistance, training and consultancy services for municipalities that lack the capacity for project design and implementation. The total loan value of projects completed or approved to date is €19.9 million. Eleven projects have been completed, including a few EE projects. Twenty projects are currently under implementation. About one third of municipalities have started to increase their revenue earnings and/or cost savings from the completed projects. An additional 21 municipalities are preparing investment projects with PIU support. Sources: World Bank, 2009. Project Appraisal Document for a Municipal Services Improvement Project in Macedonia. World Bank: Report No. 462 16-MK. Washington, D.C., March 2009; World Bank, 2012a. Project Paper on a Proposed Additional Loan and Restructuring for the Municipal Services Improvement Project in Macedonia. World Bank: Report No. 67713-MK. Washington, D.C., April 2012; World Bank, 2013b. Implementation Status and Results Report. MSIP: Sq.no 11. Washington D.C., June 2013. National Super ESCO, Energy Service Agreement (ESA) Model A super ESCO is a government-owned corporation established primarily to undertake EE projects in the public sector. As a public enterprise, it can:  Sign contracts with other public agencies without going through a competitive process.  Access public, donor, and other funds and, thus, can offer 100 percent project financing to public entities. A possible operational model for the Super ESCO would be the use of energy service agreements (ESAs). Under such an approach the Super ESCO would provide 100 percent financing for the thermal retrofit of a public entity, creating an ESA. Under the ESA, public entities continue to pay the same baseline energy expenditures to the Super ESCO after a retrofit is completed, despite the reduction of their energy expenditures (Box 4.4).43 The Super ESCO then pays the utility actual bills and uses the surplus savings as repayment of the retrofit 43 One public sector stakeholder interviewed for this study expressed concern over the monitoring of the contract, and the responsibility for losses caused by inflation (Appendix I). Sometimes, an additional verification process is conducted to ensure that energy expenditures have in fact been reduced. Baseline payments from public entities are also adjusted via a predetermined formula for expected changes including: tariff levels, heating load, number of occupants, and inflation. 63 costs. After the ESA contractual period (usually 8 or so years), the public entity resumes paying the utility directly and reaps the full financial benefits of the retrofit (Figure 4.12). Figure 4.12: Potential Super ESCO Arrangement in Belarus *ESA=Energy Service Agreement (usually for 5-8 years depending on the time needed to recover EE investment) in which a certain level of energy service and cost savings are guaranteed in return for monthly payments based on pre-retrofit energy cost. Source: Authors. The Super ESCO typically subcontracts the implementation of EE retrofits to private or commercial contractors, thereby fostering the growth of the energy service industry. Super ESCOs can thus serve as an incubator for private ESCOs, while allowing the concept of energy performance contracting to become accepted, and providing the private ESCOs with experience and a track record for their future marketing. 64 Box 4.4: The Energy Service Agreement (ESA) An energy service agreement (ESA) is a contracting mechanism to implement EE projects on turn-key basis – i.e., design, equipment procurement, construction/installation, and savings verification. Typically, compensation is tied to actual energy savings from the client or ‘host facility.’ The ESA allows host facilities with limited capital to pay for EE upgrades from future energy savings, while mobilizing private capital and sharing of project performance risks. ESAs are generally carried out by energy service companies (ESCOs), or energy service providers. Source: Authors. As there are currently no private ESCOs in Belarus, and not likely to emerge in the near term, Super ESCOs can be used to accelerate investments in the public sector, which private ESCOs may be unable to serve in the near term, and to provide economies-of-scale. They can also be used to catalyze ESCO business models. One example of a Super ESCO is renewable resources and energy efficiency (R2E2) Fund in Armenia (Box 4.5) which also serves another function as an EE Revolving Fund. 65 Box 4.5: Super ESCO and EERF in Armenia – R2E2 Fund The R2E2 Fund was established in 2005 initially as a PIU for a World Bank-supported EE/renewable energy (RE) project. The Fund operates on a fully commercial basis and is governed by a board of trustees made up of representatives from the government, private sector, NGOs, and academia. Day-to-day activities are managed by a government-appointed executive director, supported by technical and financial staff. The Fund is currently implementing a World Bank/GEF-supported project that provides EE services in public sector facilities—including EE investments in schools, hospitals, and administration buildings as well as street lighting—using a revolving fund scheme. For entities that have their own revenue streams outside of government budget, the R2E2 fund provides loans to these entities directly. For schools and other public entities that are not legally or budget independent, ESAs are used. Under the ESA, a public entity pays the R2E2 Fund its baseline energy costs (with adjustments for energy prices, usage, and other factors) over the contract period. The Fund designs the project, hires subcontractors, oversees construction and commissioning, and monitors the project. In this case, the client incurs no debt; the Fund directly pays the energy bills to the utility on the client’s behalf, and retains the balance to cover its investment cost and service fee. R2E2 Fund uses simplified performance contracts to shift some performance risks to private construction firms/contractors and to support the build-up of an ESCO industry in Armenia. Under these contracts, firm selection is based on the net present value of the projects proposed, and a portion of their final payment (around 30 percent) is based on a commissioning test. The investment criteria for the R2E2 Fund are that projects have a minimum 20 percent energy savings and simple payback period of less than 10 years. While R2E2 has an active EERF function, it also acts as a super ESCO, subcontracting out to private construction firms/contractors with simplified performance contracts. In this way R2E2 Fund shifts some performance risk to the private contractors and supports the build-up of an ESCO industry in Armenia. Under these contracts, firm selection is also based on the net present value of the projects proposed, and a portion of their final payment (around 30 percent) is based on a commissioning test. Source: World Bank, 2012b. Project Appraisal Document for an EE Project in Armenia. World Bank: Report No. 67035-AM. Washington, D.C., March 2012. EE Revolving Fund (EERF) An EERF is a fund which makes loans to EE projects in the public sector. Savings from these projects are then used to pay back the loans so new loans can be made. Because many EE projects have positive financial rates of return, capturing these cost savings and reusing them for new investments creates a more efficient use of public funds than typical budget- or grant-funded approaches. Public sector investment in EE can help demonstrate the commercial viability of EE investments and provide credit histories for public agencies, paving the way for future commercial financing. 66 EERFs may offer many services, through a range of financing “windows.” 44 Two common windows are a debt financing window and energy service window. An EERF with a debt financing window in Belarus would make loans directly to public entities, which then use these funds to pay for thermal retrofit of their properties. The retrofits may be conducted by the ZhREO or private contractors. The savings that result from the retrofit can then be used by the public entities to pay back the loan from the EERF (Figure 4.13). The EERF could pool government, IFI, donor and even some commercial financing into one program, thereby creating a sustainable and scaled-up structure. Figure 4.13: Potential EERF for Belarus with Debt Financing Source: Authors. Where public entities lack the capacity to implement EE projects or are unable to borrow (as is the case currently in Belarus), the EERF can also provide an energy service agreement window. The ESA window offers a full package of services to identify, finance, implement, and monitor EE projects. These can be administered through the EERF, much like under the Super ESCO arrangement (Figure 4.14). 44 Possible windows for EERFs include debt financing windows, energy services windows, risk guarantee windows, grants window, budget capture, and forfeiting. A description of these is provided in Appendix A 67 Figure 4.14: Potential EERF for Belarus with ESA Window, Acting as a Super ESCO Source: Authors. Initial capital for the EERF could come from a combination of donor funds, budget allocations from the GoB, tariff levies, and revenue bonds. The fund could be managed by a newly created organization; an existing non-independent public agency; a national development bank; a utility; or another public enterprise.45 In addition to providing loans and ESAs for energy retrofits, the EERF may also provide technical assistance to public agencies and energy service providers, with procurement and implementation services that can transfer some of the implementation risk to energy service providers and facilitate the development of an energy services market. The fund can also develop standard procedures and bidding documents for procuring EE services. Similarly, it could conduct audits and ensure adequate capacity for measurement and verification (M&V), which is essential for monetizing savings.46 Other functions of the EERF could include bundling public procurement of EE projects and conducting marketing and awareness raising campaigns. As mentioned above, a good example of an EERF is the R2E2 Fund in Armenia, which also acts as a Super ESCO (Box 4.5 above). 4.5 A Roadmap for Developing Sustainable Financing for Public Buildings The financing and delivery options identified in Section 4.4 will require changes in budget regulation and public procurement rules, and will depend on the availability of the initial capital to generate an energy cost-saving cash stream (Table 4.6). Moreover, pilot programs of the delivery option are important and should be conducted as soon as possible. The key activities to 45 More guidance on the management of EERFs can be found in Appendix A 46 M&V entails: (i) Development of baseline characteristics and typical operating conditions; (ii) Clear methodology for measuring energy savings that is acceptable to all parties; and (iii) Development of estimates of the actual energy savings, cost savings, and other performance characteristics of a project. 68 be undertaken by the GoB to encourage market development and introduce more sustainable financing arrangements within the next five years are illustrated below (Figure 4.15). Table 4.6: Potential Solutions to EE Barriers in Public Buildings Category of Potential Solutions Barrier Incentive- Solutions are cross-cutting and can be phased: related  In the short-term, “Budget Capture” or retention of savings by Financing and Ministry of Finance and changes to procurement to allow life-cycle delivery cost considerations.  In longer-term, changes to Budget Code and other legislation to allow public entities and SNGs to: i) retain savings in annual budgets, ii) reallocate budget between line items, iii) enter into multi-year obligations, and iv) borrow from commercial lenders  Creation of EE Revolving Fund (EERF) or “Super ESCO” Figure 4.15: Roadmap for Scaling up EE in the Public Sector Source: Authors. Efforts can begin with a phased program to introduce the “revolving” funding mechanism, first through the “budget capture” approach and then moving to either “EERF” or “Super ESCO” approach. The legal and regulatory changes described in this section would facilitate the creation of more scalable and sustainable arrangements for financing EE in the public sector. The creation of a dedicated EERF for public buildings would help focus resources, both capital and human, on resolving the main financing and implementation capacity constraints faced by most local public entities. A series of pilot projects with public entities can then be conducted through the 69 EERF, showcasing the energy efficiency improvements and energy cost savings associated with retrofits. The EERF can then eventually begin to offer products which would attract commercial financing into public sector EE investments. 70 5 Conclusion Belarus could see substantial economic benefits and improved energy security from investments in thermal retrofits of residential and public buildings. Table 5.1 below summarizes the energy savings potential and investment cost of each ESM package in each type of building described in this study. 71 Table 5.1: Summary of Energy Savings Potential and Investment Costs, by ESM Package and Building Type Payback Payback Period, at Period, at Annual cost-recovery PV of current tariff Energy CAPEX tariff Savings, (residential) Savings, (million USD) (residential) as % GDP and current GWh and current (2013) MOE tariff MHU tariff (public) (public) <5 Floor 1,412 $ 143.16 16 years 1 year 0.23% Residential >5 Floor 1,740 $ 234.72 21 years 2 years 0.28% Educational 363 $ 28.72 2 years 1 year 0.15% End-User Heat Control Public Health 122 $ 13.81 3 years 1 year 0.05% Administrative 75 $ 19.73 6 years 3 years 0.06% Total 3,712 $ 440.14 -- -- 0.77% <5 Floor 2,315 $ 1,733.27 116 years 10 years 0.39% Residential >5 Floor 3,199 $ 2,948.39 143 years 12 years 0.55% Educational 771 $ 625.28 20 years 10 years 0.25% Simple Thermal Retrofit Public Health 262 $ 225.94 21 years 11 years 0.08% Administrative 260 $ 323.06 30 years 16 years 0.08% Total 6,807 $ 5,855.94 -- -- 1.35% <5 Floor 5,466 $ 6,176.39 175 years 15 years 1.01% Residential >5 Floor 6,591 $ 8,047.84 189 years 16 years 1.21% Educational 2,030 $ 1,471.40 18 years 9 years 0.64% Deep Thermal Retrofit Public Health 686 $ 523.83 19 years 10 years 0.22% Administrative 801 $ 733.37 22 years 12 years 0.25% Total 15,574 $ 16,952.83 -- -- 3.33% Source: Authors. 72 Deep thermal retrofits in pre-1996 multi-family, educational, health, and administrative buildings can alone result in a reduction of more than 15,500 GWh of heat energy per year, or about 6.7 percent of final energy consumption in Belarus in 2013. About USD 17 billion would be needed to make the necessary investments in deep renovation for all building types. At cost- recovery tariffs, payback periods range from 9 – 16 years, excluding public buildings supplied by CHP plants (which sell heat at lower tariffs than the HOB plants). The fiscal savings that could be achieved by deep renovation is substantial. The present value of the energy saved annually by completing deep renovations is about 3.33 percent of Belarus’ GDP (2013), or about USD 2.39 billion. The reductions in heat consumption would save Belarus about USD 578 million per year (at 2015 prices) just on imports of natural gas. There are also important ancillary benefits, in terms of job creation and energy security, to investing in deep retrofits. The reduction in transfers from non-residential to residential customers is likely to increase Belarus’ industrial competitiveness. Non-residential customers, including industrial enterprises, currently pay a 50 percent premium over the actual production cost on their electricity consumption to support underpriced residential heat.47 If non- residential electricity prices are reduced back to cost-recovery levels, the average unit energy cost of manufacturing could decrease by about 24 percent. 48 Gains can also be expected in the job market. Since building renovations can be labor-intensive and rely on non-exportable workers, it is expected that a program which invests USD 1 billion a year in deep renovations could sustain 16,000 jobs over a 17-year period. Thermal retrofits in residential and public buildings will improve comfort levels and indoor air quality as well. Finally, reduced energy consumption means Belarus will be less reliant on importing natural gas, enhancing its energy security. Much can be achieved in 5 – 8 years. To realize these benefits, the GoB needs to take several actions to enable rational economic decisions, introduce sustainable financing and delivery models and address key implementation barriers (see sections 3.3 and 4.3 above). In the residential sector, consumption-based billing for heating at the apartment level should be introduced in parallel with higher heating tariffs, on a path to full cost-recovery. At the same time, the rollout of extensive public information campaigns about consumption-based billing and the benefits of energy efficiency, more effective social assistance programs, and cost reductions on the supply side will be crucially important. Installations of TRVs and HCAs to allow for apartment level heat control and billing can then be piloted and scaled up nationally to remove key incentive barriers for investments in thermal retrofit and will provide a foundation for the proposed financing mechanisms (see 3.4 above).49 47 World Bank, “Heat Tariff Reform and Social Impact Mitigation: Recommendations for a Sustainable Di strict Heating Sector in Belarus”, 2014. 48 The industries that will be most impacted are: wood, textile, food and paper. World Bank, “Heat Tariff Reform and Social Impact Mitigation: Recommendations for a Sustainable District Heating Sector in Belarus”, 2014. 49 The possibility to regulate the heat consumption on apartment level and arrangement of pilot schemes were identified as critical elements of tariff reform in consultations with the Ministry of Housing and Utilities. 73 In the public sector, the GoB should consider introducing regulatory changes to allow greater flexibility in public sector budgeting and financing, specifically for energy efficiency improvements. The regulatory changes include allowing for multi-year contracting of energy efficiency services, and retention of energy cost savings by subnational governments and other public entities. Adjustments in public procurement would be needed also to allow for consideration of investments’ life-cycle costs. This will facilitate energy performance contracting (see section 4.3 above). The regulatory changes would facilitate the revolving of energy cost savings and the creation of more scalable and sustainable arrangements for financing EE in the public sector. Such arrangements could include a dedicated EE revolving fund and the use of energy savings performance contracting (see 4.4 above). After choosing a delivery option, pilot programs should be conducted as soon as possible and a national program should be rolled out, building upon lessons learned in the demonstration projects. In both residential and public building sectors, the GoB will need to evaluate and choose from various financing and delivery options. It is important that future financing and delivery mechanisms harness the effective elements of the existing institutional and financial framework. The introduction of new financing and delivery mechanisms, preceded by pilots, would facilitate the learning process and allow sufficient time to make required changes in the existing legislation for both public and residential buildings. Technical assistance from IFIs can support the GoB in assessing delivery options, designing institutional set-ups and staffing requirements for the selected options, and developing investment plans. 74 Appendix A: Possible Windows of EERFs An EERF should be designed to serve the needs of all public agencies. Some of these agencies may not be creditworthy, or have no borrowing history; others may not have available borrowing capacity; and others may not have the internal capacity to identify, design, and manage the implementation of EE projects. To address some of these issues, the EERF may offer several financing products and “windows,” which may include:  Debt financing window – can offer 100 percent debt financing. Options for payment security include: public entity pays baseline bills to escrow while EERF pays energy bills from escrow, guarantee from MOF.  Energy services window - for municipalities that lack the capacity to borrow funds or to effectively implement EE projects, an energy services agreement (ESA) can offer a full package of services to identify, finance, implement, and monitor EE projects.  Risk guarantee window – leverage commercial financing through risk guarantee  Budget capture - may be used when the public agency receives dedicated funds from the MOF or another government agency to pay its energy bills. In such cases, after the EERF invests in EE projects implemented by the public agency, the government (i) reduces its budgetary outlays to that public agency by an amount equivalent to the amount of energy cost savings (thereby “capturing” the savings) and (ii) redirects these funds to the EERF. This would require that the government agrees to provide the same amount to the public agency for energy bill payments in subsequent years.  Grants window – When sustainable financing sources is available (such as service improvement fee), fund can give grants to improve economics of projects  Forfeiting – Buying future savings from projects conducted by another ESCO, giving the ESCO more capital to do extra projects (not applicable in Belarus) 75 Appendix B: Management of EERFs EERFs may be managed by newly created organization; an existing non-independent public agency; a national development bank; a utility; or another public enterprise. International best practice has shown that the fund functions best when established as an independent organization—either a corporation or an NGO. EERFs are also usually governed by a government-appointed board of governors or board of trustees made up of both public sector and private sector members. The governing board and the management team need to provide a balance between public interest (since the fund will be targeting public agencies) and private sector perspectives regarding financial structuring of projects, risk assessment, and market development. The fund management team must have: knowledge and understanding of EE technologies and options; skills in market assessment and pipeline development; capabilities in credit analysis, financial analysis, and project appraisal; and understanding of EE and energy services markets. 76 Appendix C: Case Studies of Completed Thermal Retrofit Projects This appendix presents information on selected residential and public buildings in Belarus that have already received thermal retrofits. The tables below provide information (where available) on the types of retrofits implemented, their cost and the resulting energy savings. Twelve residential buildings were identified and reviewed for this study. For buildings where energy savings information is available, savings were between 19 and 46 percent (Appendix Table C.1). Appendix Table C.1: Selected Residential Buildings Receiving Thermal Retrofits Heat Heat consumption Floor Primary consumption for heating City (Year) area heating Measures taken Cost for heating Savings 2 purposes (m ) source purposes after before renovation renovation  Light plaster system for insulation of exterior walling structures  Wooden windows replaced with plastic Baranovichi insulated glazed units 5,652 DH BYR 4,334.5 million 531.161 Gcal 354.696 Gcal 33% (2013)  Thermal insulation of roof  Interior work  Improvement of the heating regulation system  Light plaster system for insulation of exterior walling structures 65-70% national  Window replacement No Novopolotsk budget, 0.198 3,525 DH 485 Gcal information (2014)  Thermal insulation of roof 30-35% residents’ Gcal/hour available  Interior work contributions  Installation of heat regulators 77 Heat Heat consumption Floor Primary consumption for heating City (Year) area heating Measures taken Cost for heating Savings 2 purposes (m ) source purposes after before renovation renovation Ozeritskaya  Exterior wall insulation with Styrofoam No Sloboda boards No information 380 DH BYR 81,548,996 52.71 Gcal information agrotown  Plastering and painting available available (2012)  Insulation of longitudinal exterior walls with a light plaster system  Insulation material: Styrofoam boards PPT- 15N-A  Roof insulation with Styrofoam boards PPT-25N-A No No information 0.207 No information Minsk (2014) 4,255 DH  Insulation material used for the basement information available Gcal/hour available exterior walls: mineral wool boards PL75 available  Windows: wooden insulated glazed units with a tilt and turn mechanism  Interior work: replacement of main pipelines and replacement of heat regulators  Insulation of longitudinal exterior walls with a light plaster system, insulation material: Styrofoam boards 15N-A  Roof insulation with Styrofoam boards No No information 0.207 No information Minsk (2008) 4,259 DH PPT-35-A information available Gcal/hour available  Windows: wooden insulated glazed units available with a tilt and turn mechanism  Interior work: replacement of main pipelines; replacement of heat regulators 78 Heat Heat consumption Floor Primary consumption for heating City (Year) area heating Measures taken Cost for heating Savings 2 purposes (m ) source purposes after before renovation renovation  Exterior wall insulation (including jointing) with PAROC thermal insulation polystyrene boards  Windows: split (insulated glazed units on the inside and a glass pane on the outside)  Roofing: RANNILLA metal tiles  Rafter system: boards and beams BYR 1,388,433 (in  Heating system: two-pipe, with bottom No No Soligorsk benchmark prices of No information 3,420 DH manifold distribution connected to heating information information (2003) 1991) available networks through a regulated hydraulic available available elevator. The heating system risers are exposed.  Heating appliances: MC1040 radiators with thermal output through double-control valves. An RT-98 regulator is provided to control carrier supply. Heat is metered by TEM-05M-1. No information 2 2 Minsk (2011) 3,050 DH No information available 135 kWh/m 97 kWh/m 28.1 % available No information 2 2 Minsk (2011) 5,500 DH No information available 135 kWh/m 72 kWh/m 46.7 % available No information 2 2 Minsk (2011) 3,999 DH No information available 135 kWh/m 110 kWh/m 18.5 % available No information 2 2 Minsk (2011) 3,190 DH No information available 135 kWh/m 84 kWh/m 37.8 % available No information 2 2 Minsk (2011) 3,515 DH No information available 135 kWh/m 81 kWh/m 40.0 % available 79 Heat Heat consumption Floor Primary consumption for heating City (Year) area heating Measures taken Cost for heating Savings 2 purposes (m ) source purposes after before renovation renovation  Façade insulation with 80 mm Styrofoam boards PPT-15N in the Termoshuba style (a multilayer light structure with a thin layer of plaster), including repair of cracks in the facade joints.  Insulation of window jambs with 20 mm rigid mineral wool boards  Window sets replaced for insulated glazed BYR 690,517 (in prices No No Zhodino units. of 1991), including No information 1,080 DH information information (2006) BYR 483,175 for available  Balcony unit replacement and single-pane available available thermal renovation glazing of recessed balconies.  Balcony wall capping with metal profile.  Insulation of the crawl space ceiling with 100 mm FASROCK mineral wool boards.  Thermal insulation of roof.  Repair of basement entrances and interior finishing of stairwells. Source: Authors. Thermal retrofits in six public buildings were reviewed as part of this study. Energy savings information is not available for most of these buildings. Investment costs vary widely, depending on the scope of the retrofit, but could reach as high as about BYR 4 billion (Appendix Table C.2). 80 Appendix Table C.2: Selected Public Buildings Receiving Thermal Retrofits Heat Heat consumption Floor Primary consumption for heating City area heating Measures taken Cost for heating Savings 2 purposes (m ) source purposes after before renovation renovation Oblast-level 5,409 DH  Thermal insulation of the building façade with BYR 3,691 313 tce (heat 277 tce 12% Hospital in mineral wool boards and decorative plaster million and hot Baranovichi water) (2014) Republican level 16,108 DH  Exterior wall repair, thermal insulation and BYR 875,086 (in Information Information Information therapeutic painting with façade paint. prices of 1991), not available not available not available institution in  Repair and painting of the main entrance including BYR Minsk (2006) doorway interior. 661,885 for  Construction of perimeter pavement around thermal the building. renovation  Renovation of porches, basement entrances and areaways.  Thermal insulation of the basement service rooms.  Replacement of old wooden windows for double-glazed EE windows throughout the building. 81 Heat Heat consumption Floor Primary consumption for heating City area heating Measures taken Cost for heating Savings 2 purposes (m ) source purposes after before renovation renovation Regional-level 7,649 DH  Thermal insulation of the building exterior BYR Information Information Information polyclinic in walls, base, entryway, roofing and roof 1,254,137,000 not available not available not available Minsk (2012) ventilation shafts with a light plaster system. (in prices of  PZh150 mineral wool boards and PPT-35B 2006), including Styrofoam board are used as materials for BYR thermal insulation. 1,174,022,000  Replacement of old windows for double-glazed for thermal EE windows throughout the building (thermal renovation 2 transfer resistance 1 m x ̊C/W),  Repair of roof of the 7 and 3-floor parts of the building Replacement of windows and doors at all entrances to the building and roof access. Oblast-level 764 DH  Window replacement BYR 420 million Information Information Information kindergarten in not available not available not available Sloboda agrotown (2012) Oblast-level 4,275 DH  Termoshuba-style exterior wall insulation BYR 55 billion – Information 0.183 Information secondary system full scope not available Gcal/hour not available school in Minsk  PPT-15N Styrofoam boards BYR 3.9 billion – (2009)  PPT-35B Styrofoam roofing thermal  Insulated triple-pane glazed units renovation  Relaying of heating pipelines  Individual heating station in the maintenance building, and hot water heater  Automatic heating control 82 Heat Heat consumption Floor Primary consumption for heating City area heating Measures taken Cost for heating Savings 2 purposes (m ) source purposes after before renovation renovation Regional-level 380 DH  Replacement of existing wooden windows BYR 90,563,000 Information Information Information administrative with new triple-pane glazed units of the (in prices of not available not available not available building in B.1.036.7-143.03 series. The existing EE 1991), including Minsk (2007) window units remain. BYR 67,450,000  Thermal insulation with a light plaster for construction Termoshuba-style system with PPT-15N-A 60 and assembly mm Styrofoam boards according to STB 1437- 2004. DOILID paints for finishing of exterior facades.  A drywall ceiling is planned for offices. Source: Authors. 83 Appendix D: Possible Investment Mechanisms in the Residential Sector 50 Option Description Market conditions Examples Pros Cons EE Funds Independent entity  Local commercial Bulgaria, Greece,  Can be sustainable; mandated  May distort market providing financing banks unable/unwilling Romania, Slovenia to promote EE  Could create monopoly for EE (e.g., loans, to enter EE market  Can develop specialized  May not operate efficiently ESA, guarantees) products; centralized  Can be captured by political experience and lessons interests Commercial Commercial banks  Developed financial Austria, Belgium,  Sustainable  Only serves creditworthy Bank provide loans for market familiar with EE Bulgaria, Czech  Allows for competition of customers Financing EE  Creditworthy Republic, Germany, financing and builds off  May involve high interest rates customers Lithuania, existing credit system  Banks may lack incentive to Netherlands, market aggressively Poland, Romania, Spain, UK Partial Credit Partial coverage of  Developed financial Bulgaria, Greece,  Encourages commercial  Requires mature banking Guarantees potential losses market familiar with EE Romania, Slovenia banks to finance EE sector interested in EE from EE loan  Creditworthy/marginally  Helps overcome risk financing defaults creditworthy clients perception of banks  May need substantial capacity  Banks willing to provide  Can lead to sustainable building of banks EE loans commercial financing  May serve only creditworthy customers Utility EE Utility implement  Payment discipline and Belgium, Denmark;  Can be done sustainably  Utilities lack incentives to programs EE in residential adequate billing France, Ireland,  Builds off of utility reduce energy sales buildings in the practice Italy, Netherlands, relationships and services  Regulations may limit new form of DMS or an  Financial capacity of UK  Allows for simple collections utility services, billing EEO scheme utilities to provide (on-bill repayment)  Can create a monopoly upfront financing  Effective delivery mechanism to implement programs 50 “Western Balkans: Scaling Up Energy Efficiency in Buildings.” 2013. The World Bank Group. 84 Appendix E: Possible Investment Mechanisms in the Public Sector 51 Option Description Market conditions Examples Pros Cons Grants Public budget, IFI/  No market capacity, need to Armenia, Builds market capacity, easy Not sustainable/scalable, donor funds provided to pilot and demonstrate EE Belarus, FYR to implement, can directly relies on limited grant public entities to cover benefits Macedonia, finance municipalities (incl. resources 100% of EE project  Availability of grant funds Kazakhstan, uncreditworthy/ budgetary costs  Limited creditworthiness Kosovo, independent entities) Montenegro, Serbia Budgets/ Partial budget  Low market capacity, some co- Bosnia & Builds market capacity, easy Not sustainable or scalable, Grants w/ co- support/grants with financing is available Herzegovina, to implement, can directly relies on limited grant funds financing some co-financing  Availability of grant funds FYR finance municipalities that (loans, equity) from  Limited creditworthiness Macedonia, may not be able to borrow, public entities Lithuania, co-financing increases Montenegro, ownership Poland, Serbia MOF Budget financing to  Underdeveloped public/ Belarus, FYR Builds market capacity, Requires MOF to allocate financing w/ public municipal credit markets Macedonia relatively easy to implement, substantial budget for budget agencies/municipalities,  Limited equity among public (MSIP), can directly finance financing, sustainability capture with repayment through agencies Hungary, municipalities that are not relies on MOF PIU, scale reduced future  High commercial bank lending Kosovo, able to borrow, could allow relies on PIU and borrower budgetary outlays rates and low tenors Lithuania funds to revolve (if MOF capacities, reducing future reinvests reflows), no budget provisions can be  Availability of budgetary space repayment risks complex for MOF financing Utility (on-bill) Utility borrows and  Requires regulations for utility Brazil, China, Streamlined repayments, Requires changes in utility financing finances EE participation India, Mexico, lower repayment risk if risk regulations and billing investments in public  Strong financial position and Sri Lanka, of utility disconnection, systems, creates potential clients; recovers financial management of utilities Tunisia, builds off of utility for monopolistic behaviors, investments through  Payment discipline among United States, relationships and services, financing competes with customers’ utility bills public clients, adequate energy Vietnam can be done on a local banks, may be easier pricing and billing practices sustainable and scalable for power utilities than basis heating ones EE revolving Independent, publicly-  Underdeveloped public/ Armenia, Builds market capacity, can Recovering operating costs funds owned entity provides municipal credit market Bulgaria, directly finance in early years is difficult, financing for EE to  Access to public budget or IFI India, FYR municipalities that are not using private fund manager 51 “Western Balkans: Scaling Up Energy Efficiency in Buildings.” 2013. The World Bank Group. 85 Option Description Market conditions Examples Pros Cons public clients, loans to capitalize fund Macedonia able to borrow, can better to oversee public funds may repayments based on  Credible and proactive fund (proposed), leverage funds by pooling, not be politically desirable, estimated energy cost manager can be recruited Romania, greater potential for heavy reliance on good savings  Public agencies able to enter Serbia bundling of projects and fund manager, need into multiyear obligations and (proposed), development of simple mechanisms to help ensure retain energy cost savings Uruguay ESCOs, centralized public client repayment, implementation and fund can act monopolistic procurement can lower costs, can recover operating costs through fees Super ESCO Publicly owned  Underdeveloped public/ Armenia, Builds ESCO market Super ESCO can be company that provides municipal credit market China, capacity through monopolistic and may be financing for EE  No local, active, capable ESCOs Croatia, subcontracting, helps subject to public sector projects with public  Rigid public procurement rules Poland, address public procurement bureaucracies entities with make ESCO hiring difficult Ukraine, and financing issues, (procurement, staffing, repayments based on United States, centralized implementation budgeting), appropriate exit  Credible public entity exists with energy cost savings Uruguay and procurement can lower strategy may be needed if demonstrated capacity to costs, greater potential for private ESCO/ESPs enter subcontract/manage subprojects bundling of projects and the market, super ESCO development of simple requires access to long- ESCOs models term financing Credit line Dedicated municipal  Underdeveloped public/ Brazil, India Builds commercial lending Relies on strong banking with bank lending to public municipal credit market (municipal market by demonstrating partner with incentive and municipal agencies for EE, using  High commercial bank lending infrastructure public agencies can repay, ability to proactively develop (development) government or IFI rates and low tenors fund), Mexico, allows public agencies to pipeline and offer good funds  Existence of credible municipal Turkey undertake own financial products, serves bank (proposed) procurement/implementation only creditworthy or development bank willing to lend for EE and assume which can allow for greater municipalities, some repayment risks scale, allows for lower municipal banks do not do interest rates, funds can proper risk assessments  Municipalities must have ability revolve (if bank relends and appraisals or take risks and willingness to borrow reflows for EE) making it  Public agencies able to retain more sustainable energy cost savings, pay based on consumption Credit line Selected commercial  Good banking partners willing to China, Builds capacity of Relies on strong banking with bank(s) lending to lend and assume risks Germany, commercial banks to market partner with incentive and commercial public agencies for EE,  Municipalities must have ability India, Poland, and appraise EE projects, ability to proactively develop bank(s) using government or IFI and willingness to borrow Serbia, mobilizes commercial pipeline and offer good funds, or purchase of  Public agencies able to retain Turkey, financing which can deliver financial products, serves account receivables energy cost savings, pay based Tunisia scale and be sustainable, only creditworthy from private ESCOs on consumption allows public agencies to municipalities able to 86 Option Description Market conditions Examples Pros Cons (i.e., factoring)  Reasonable, competitive lending undertake own borrow, requires rates, reasonable tenors, procurement/implementation complementary TA to work collateral requirements well, EE investments have to compete with other investment for limited capital, some credit lines distort the market Partial credit Risk-sharing facility that  Good banking partners willing to Bulgaria, Allows banks to expand Relies on network of strong guarantee can offer partial lend and assume some risks CEEF their potential customer banking partners with ability coverage to  Municipalities must be (regional), base, mobilizes commercial to proactively develop commercial lenders marginally creditworthy and China, FYR financing which can deliver pipeline and assume some from EE loan defaults willing to borrow Macedonia, scale and be sustainable, risks, partial risk coverage  Public agencies able to retain Hungary, can allow more banks to may only allow lending to a energy cost savings, pay based Philippines, participate thereby few additional on consumption Poland, increasing competition, can municipalities, can create Tunisia help address moral hazard depending on  Reasonable, competitive lending overcollateralization/short risk coverage rates tenor issues, allows public agencies to undertake own procurement/ implementation Commercial Municipalities take  Requires well-developed Bulgaria, Mobilizes commercial Only makes sense for very financing, commercial bank loans municipal credit and rating Denmark, financing which can deliver large bundles of projects, bonds or issue bonds to systems India, United scale and be sustainable, only highly creditworthy finance EE investments  Financiers willing and able to States elements of competition can municipalities can use these lend to public sector for EE help lower financing costs, schemes, relatively high projects can help address transactions costs  Large municipalities with strong overcollateralization/short technical capacity willing to tenor issues, allows public bundle many EE projects agencies to undertake own together procurement/ implementation Vendor credit, Equipment suppliers  Large, credible local and/or China, EU, Mobilizes commercial Relies on local banks and leasing that provide energy- international vendors able and United States financing which can deliver leasing companies to efficient equipment willing to finance public EE scale and be sustainable, provide reasonable cost under lease contract, projects can help address financing and assume credit usually with lease  Local bank financing available overcollateralization/short risks, serves only very payments based on for vendor leasing tenor issues, financing and creditworthy public estimated energy  Creditworthy municipalities able procurement in one agencies, vendors must be savings to sign long-term vendor contract, lease may not able to take on substantial contracts count against public debt debt and offer long-term financing to municipalities,  Public agencies able to retain 87 Option Description Market conditions Examples Pros Cons energy cost savings, pay based financing tied to certain on consumption products/brands, only some building components suited for leasing (lighting, solar water heaters, boilers) Advanced ESCO finances and  Large, credible local and/or Canada, Mobilizes commercial Relies on local banks and commercial implements public EE international ESCOs able and Czech financing which can deliver ESCOs to provide or project projects, often with at willing to finance and bid on Republic, scale and be sustainable, reasonable cost financing financing least part of repayment public EE projects Germany, can help address and assume credit risks, (ESCOs) tied to energy savings  Local bank financing available Hungary, overcollateralization/short serves only very over contract duration for ESCO lending, municipal India, Japan, tenor issues, full project creditworthy public lending against performance South Korea, cycle (audit through agencies, ESCOs must be guarantees or ESCO refinancing United States commissioning) outsourced able to take on substantial  Creditworthy municipalities able to one firm, ESPC may not debt and offer long-term to sign long-term contracts w/ count against public debt, financing to municipalities, ESCOs public agency shifts financing many be tied to technical risks to third party certain products/brands (if  Public agencies able to retain ESCO is equipment energy cost savings, pay based supplier), transaction costs on consumption make only very large  Municipalities must have projects feasible, ESCO capacity to procure and industry is very difficult to negotiate complex ESPCs develop, public procurement issues take time to solve, new ESCOs often not credible to clients and banks, require clear ‘rules of the game’ (M&V protocols) Source: Based on ESMAP, 2012, op.cit.; Singh et al., 2010, op.cit. 88 Appendix F: Calculating Potential of ESM Packages for Residential Buildings This appendix describes the methodology for calculating the potential of the ESM packages outlined in Section 3.2. As such, this appendix focuses only on “<5 Floor” and “>5 Floor” residential buildings, and excludes “Single Family” buildings. Section F.1 describes how total annual consumption for each building type was calculated. Section F.2 discusses the determination of potential energy savings for the packages. Section F.3 describes how total investment costs (CAPEX) was determined. Section F.4 describes how the supply curves were created. F.1 Total Annual Consumption by Building Type The first step is to determine the total annual energy consumption for heating by each building type. Baseline consumption (in kWh/m2) was estimated based on building materials and thermal protection standards for each building type, and compared against actual consumption in a sample of buildings in Minsk. The estimated baselines were found to be about two to eight percent off of the actual consumption numbers, depending on the building type. The estimated baselines were adjusted to bring them into line with the sample observations. For <5 Floor buildings, the weighted average baseline consumption is 183 kWh/m2; for >5 Floor buildings, the weighted average baseline consumption is 137.5 kWh/m2. These are baseline numbers assuming an internal temperature of 18C, but the temperature within apartments is often substantially higher. Therefore, in order to determine how much energy savings the ESM packages could achieve, baseline consumption numbers were adjusted to a more realistic internal temperature of 24C. Appendix Table F.1 shows the baseline and adjusted baseline for both types of buildings. Appendix Table F.1: Baseline and Adjusted Baseline Consumption in pre-1996 Residential Buildings Baseline Consumption (weighted Baseline Adjusted to Internal Temperature of Building Type average, kWh/m2) 24C (weighted average, kWh/m2) <5 Floor 183 246 >5 Floor 137.5 184 Source: Authors. Total consumption for each building type was calculated by taking the adjusted baseline consumption and multiplying by the number of buildings and average floor area per building for each building type. Appendix Table F.2 shows the results of these calculations. 89 Appendix Table F.2: Total Annual Consumption in pre-1996 Residential Buildings Adjusted Total Floor Number of Average Floor Total Annual Baseline Building Type Area Buildings Area per Consumption Consumption (thousand m2) (thousands) Building (m2) (GWh) (kWh/m2) <5 Floor 246 60,954 371.74 163.97 14,998 >5 Floor 184 100,601 23.98 4,195.01 18,477 Source: Authors. The total annual consumption for <5 Floor buildings is 14,998 GWh. For >5 Floor buildings, it is 18,477 GWh. These total annual consumption numbers are used as the basis for determining the potential energy savings of each ESM package. F.2 Potential Energy Savings of Each ESM Package The percentage of potential energy savings of each individual ESM (installation of TRVs and HCA; replacement of windows; and insulation of walls and roofs) were estimated based on expert assessments and actual savings achieved in buildings where these measures have already been implemented. Appendix Table F.3 shows the weighted average percentage savings for each type of building. Appendix Table F.3: Relative Energy Savings from Implementation of ESMs TRV and Allocator Window Replacement Wall and Roof Building Type Savings Savings Insulation Savings <5 Floor 12% 6.21% 26.99% >5 Floor 12% 8.61% 23.6% Source: Authors. It is also necessary to take into account buildings that have already received these measures, or that cannot receive them for technical reasons. Appendix Table F.4 shows what percentage of buildings would actually receive each ESM. 90 Appendix Table F.4: Applicability of ESMs % Buildings Where ESM % Buildings Where ESM % Buildings ESM Already Implemented Cannot Be Applied Receiving the ESM TRVs and HCA N/A 21% 79% Window 4% N/A 96% Replacement Wall/Roof 4% N/A 96% Insulation Note: Assumption was that about 21 % of buildings have radiators within the walls, making installation of TRVs and allocators impossible. Source: Authors. To determine the amount of energy saved by each ESM package, it is first necessary to determine the potential savings by each individual ESM. These can then be combined into packages as necessary. Energy savings are calculated by multiplying the total consumption of each building type by the relative savings provided by the ESM and the percentage of buildings receiving the ESM. Appendix Table F.5 shows these calculations. Appendix Table F.5: Potential Annual Energy Savings of Individual ESMs Total Annual Relative Buildings Potential Building Consumption ESM Savings by Receiving ESM Annual Energy Type (GWh) ESM (%) (%) Savings (GWh) TRVs and Allocators 12% 79% 1,412 <5 Floor 14,998 Windows 6.21% 96% 893 Walls and Roofs 26.99 96% 3,878 TRVs and Allocators 12% 79% 1,740 >5 Floor 18,477 Windows 8.21% 96% 1,525 Walls and Roofs 23.6% 96% 4,178 Source: Authors. The energy savings of the individual ESMs are combined into packages in Appendix Table F.6. These packages assume that TRVs and allocators are implemented first; savings from window replacement and wall and roof insulation take prior savings from TRVs into account. 91 Appendix Table F.6: Potential Annual Energy Savings of ESM Packages Package Building Type Annual Savings, GWh <5 Floor 1,412 End-User Heat Control >5 Floor 1,740 <5 Floor 2,315 Simple Renovation >5 Floor 3,199 <5 Floor 5,466 Deep Renovation >5 Floor 6,591 Source: Authors. F.3 CAPEX for ESM Packages In order to determine the cost of each package, it is necessary to know the unit cost of each measure: the cost per TRV and allocator, the cost per m 2 of window area and the cost of insulation per m2 of wall area and roof area. These are shown in Appendix Table F.7. Appendix Table F.7: Cost of Implementing ESMs Measure Unit Cost Thermal insulation of walls 94 USD/m2 Thermal insulation of roofing 33 USD/m2 Window replacement 230 USD/m2 Introduction of TRVs 26 USD each Introduction of HCA 22 USD each Source: Authors. These unit costs are then multiplied by the total relevant units in each building type: wall area, roof area, window area and number of heaters. These are shown in Appendix Table F.8. Appendix Table F.8: Number of Heaters and Area of Walls, Roofs and Windows by Building Type Building Type Number of heaters Window area Roof area Wall area (thou.) (thousand m2) (thousand m2) (thousand m2) <5 Floor 3,802 6,567 25,870 40,258 >5 Floor 6,233 1,251 15,312 51,253 Source: Authors. These numbers can be multiplied by the unit cost to determine the total CAPEX for each individual ESM. They must also be multiplied by the percentage of buildings that will receive the 92 measure as shown in Appendix Table F.4. The totals for each individual ESM can then be combined into packages, as was done with energy savings in Appendix Table F.6. Appendix Table F.9 shows the results of the calculations for individual ESMs. Appendix Table F.9: CAPEX for Individual ESMs by Building Type Unit % Buildings Total CAPEX Building Value ESM Cost* Relevant Unit Receiving (million Type (thousands) (USD) ESM USD) TRVs and 48 # heaters 3,802 79% 143.16 allocators Window <5 Floor 230 Window area, m2 6,567 96% 1,446.94 replacement Wall/Roof 94 Wall area, m2 40,258 96% 4,443.12 Insulation 33 Roof area, m2 25,870 TRVs and 48 # heaters 6,233 79% 234.72 allocators Window >5 Floor 230 Window area, m2 1,251 96% 2,478.95 replacement Wall/Roof 94 Wall area, m2 51,253 96% 5,099.46 Insulation 33 Roof area, m2 40,258 Note: * Unit cost for TRVs and allocators simply combines the individual cost of TRVs (26 USD each) and allocators (22 USD each) into a single number. For walls and roofs, the top number represents walls and the bottom number represents roofs. Source: Authors. Appendix Table F.10 shows the CAPEX for the ESM packages. Simple and Deep Renovation both include the cost of End-User Heat Control twice, because TRVs and allocators need to be replaced after 10 years. Appendix Table F.10: CAPEX for ESM Packages by Building Type Package Building Type CAPEX (million USD) <5 Floor 143.16 End-User Heat Control >5 Floor 234.72 <5 Floor 1,733.27 Simple Renovation >5 Floor 2,948.39 <5 Floor 6,176.39 Deep Renovation >5 Floor 8,047.84 Source: Authors. 93 F.4 Supply Curves Supply curves offer a convenient visual way of analyzing the relationship between investment cost and savings. The levelized cost of energy saved is the cost of reducing a unit of energy demand (USD per kWh), discounted over the life of the implemented measure. This cost can then be compared to the current tariff as well as the full cost tariff, in order to determine which of the energy savings measures are financially viable, given current energy costs. The first step in creating a supply curve is to calculate the levelized cost of energy saved. Levelized cost is calculated by taking the total investment cost and dividing by the present value of the energy saved, with an assumed discount rate and asset life (Appendix Table F.11). Appendix Table F.11: Key Assumptions for Supply Curve Analysis Parameter Assumption Discount rate 25% opportunity cost of capital Asset life 20 years for insulation and windows 10 years for TRVs and allocators Construction period 1 year Source: Authors. Using those assumptions and the investment costs and potential savings of each package allows the calculation of levelized cost for each building type for each package (Appendix Table F.12). Appendix Table F.12: Levelized Cost for Each Package by Building Type CAPEX (million Annual Savings Levelized Cost Package Building Type USD) (GWh) (USD/kWh) End-User Heat <5 Floor 143.16 1,412 0.02840 Control >5 Floor 234.72 1,740 0.03779 <5 Floor 1,733.27 2,315 0.18933 Simple Renovation >5 Floor 2,948.39 3,199 0.23310 <5 Floor 6,176.39 5,466 0.28577 Deep Renovation >5 Floor 8,047.84 6,591 0.30883 Source: Authors. To make a supply curve for each package, the levelized costs of each building type must be ranked from lowest to highest, and cumulative annual savings calculated by starting with the savings for the building type with the lowest levelized cost, and then adding the savings of the next building type (Appendix Table F.13). In this case, <5 Floor buildings always have a lower levelized cost than >5 Floor buildings. 94 Appendix Table F.13: Cumulative Annual Savings for Each Package Levelized Cost Cumulative Annual Package Building Type (USD/kWh) Savings (GWh) <5 Floor 0.02840 1,412 End-User Heat Control >5 Floor 0.03779 3,152 <5 Floor 0.18933 2,315 Simple Renovation >5 Floor 0.23310 5,514 <5 Floor 0.28577 5,466 Deep Renovation >5 Floor 0.30883 12,057 Source: Authors. The levelized cost for each building type can then be plotted against the cumulative annual savings on an area chart to create a supply curve.52 In addition, a supply curve was made for Deep Renovation using low-cost financing and a capital subsidy to make it financially viable. To do this, a levelized cost was calculated using a 2.07 percent rate in place of the 25 percent discount rate used in the other supply curves. For the capital subsidy, CAPEX was reduced by seven percent (Appendix Table F.14). Appendix Table F.14: Calculations for Deep Renovation with Low-Cost Financing and Capital Subsidy CAPEX with Cumulative Levelized CAPEX Annual Building % Capital Subsidy Annual Cost with (million Savings Type Subsidy (million Savings 2.07% rate USD) (GWh) USD) (GWh) (USD/kWh) 10% 5,558.75 0.06261 <5 Floor 6,176.39 20% 4,941.11 5,466 5,466 0.05565 40% 3,705.84 0.04174 10% 7,243.06 0.06766 >5 Floor 8,047.84 20% 6,438.27 6,591 12,057 0.06015 40% 4,828.70 0.04511 Source: Authors. 52 The method for making these charts on Excel can be found at http://peltiertech.com/variable-width-column-charts/ 95 Appendix G: Regional Experience Implementing Apartment Level Consumption-Based Billing (Croatia) About 150,000 households in Croatia are connected to the DH network. Most of the apartment buildings served by DH have vertical piping systems that limit options for apartment-level metering and consumption except through the use of HCAs. At present, only 6 percent of residential customers, mostly in the cities of Rijeka and Karlovac are billed by the heat they consume, while the rest are billed using building level heat meters with heat costs being allocated by apartment floor area. To increase the uptake of HCAs, the Government of Croatia (GoC) enacted the Heating Energy Market Law which requires the installation of HCAs in all centrally heated multi-family buildings. Based on experiences from Rijeka and Karlovac, as well as several new EU member states, installing HCAs has reduced building heat consumption by 15 – 30 percent, lowered heating bills for most households, and improved comfort and service levels of individual apartments, improving customer satisfaction. According to DH company estimates, the average total cost of the HCA billing scheme was EUR 390 – EUR 525 (based on the typical lifecycle of a HCA battery).53 The estimated payback period for the installed cost of the HCA/TRV package is five years or less.54 Since close to 50 percent of the capital cost is subsidized by grants from local governments and the Environmental Protection and Energy Efficiency Fund (EPEEF), the payback period is only about two and a half years for households. Implementation arrangements varied slightly between Rijaka and Karlovac cities. In Rijaka, individual HOAs directly contracted one of two HCA suppliers (Brunata and Siemens) working in the local market. In Karolovac, a public tender was issued for HCA supply, installation and billing service, from which Brunata was selected. Both of these implementation approaches required strong HOAs, standardized procedures and contracts, and up-to-date market information. The key advantage of the Rijeka approach was the flexibility it afforded to HOAs by allowing them to contract directly.55 For Karlovac, a large public tender had the potential of reducing cost. To qualify for grant funding from EPEEF, HOAs needed to obtain a 70 percent sign up rate amongst households in each apartment building. 53 The exchange rate used was 1 EUR = 7.63 HRK, and estimates vary by city. 54 Assuming 9 MWh of baseline (before HCA installation) heat consumption per household per heating season, the estimated energy cost savings per household at current tariff levels may range from 65 (15% savings) to 130 (30% savings) Euro per household per heating season in Rijeka and Karlovac. 55 Keep in mind that this approach requires HOA capacity to be high. 96 Appendix H: Summary of Survey Results A survey was conducted to understand households’ perceptions of current thermal comfort levels and attitudes towards thermal retrofits in multi-apartment buildings. Interviews were conducted in the cities of Minsk, Baranovichi, Novopolotsk, and Smolevichi in buildings that have received thermal renovations in the last three years, and buildings that have yet to receive renovations. A total of 83 households in buildings without thermal renovation were surveyed, and 86 households in buildings that had received thermal renovations in the last three years. H.1 Current Levels of Thermal Comfort and Coping Mechanisms As shown in Appendix Table H.1, there are high levels of perceived indoor comfort in buildings with and without thermal renovation, based on those surveyed. Appendix Table H.1: Perceived Indoor Temperature in Buildings with and without Thermal Retrofits Households without thermal Households with thermal renovation renovation Above 18C 65.5% 83.7% About 18C 29.8% 10.5% Below 18C 4.7% 3.5% Did not answer - 2.3% Source: Authors. In households that had not received thermal renovations, only 25 percent were unsatisfied with the level of thermal comfort in their home and 22.6 percent of households used alternative sources of heat such as electric space heaters to improve thermal comfort. Amongst these, 70.2 percent had spent their own money to replace windows and entry doors. By contrast, in buildings that had started to receive thermal renovations, 57 percent of households had spent their own money to improve the thermal comfort in the winter time. Nevertheless, in buildings that had received thermal renovations, 81 percent of respondents perceived improved thermal comfort, 66.6 perceived improved building asset value and 10.1 percent noticed reduced heating costs. H.2 Concern about Increases in Heating Cost Households from buildings with and without thermal renovation expressed concern about a twofold and fourfold increase in heat tariffs. Amongst households in renovated buildings and households in buildings that have not received renovations, 82.5 percent and 66.7 percent of households were concerned about a twofold increase in the tariff. When asked about a fourfold increase, 94.3 percent of households in buildings that have received renovations and 97.6 percent of households in buildings that did not said that they were very concerned. 97 It is worthwhile to note that 11.6 percent of respondents from households that received thermal retrofit pay extra monthly contributions (in addition to the regular major repairs deduction) for thermal renovation. H.2.1 Preferred Coping Strategies against Tariff Increases As follow up questions, respondents were asked whether they would prefer normative or consumption based tariffs to cope with tariff increases, and whether they would prefer to be able to control the temperature in their apartments. Respondents were then asked if they were willing to pay for the installation of a heat control and cost allocation device with a payback of 5 years. Their responses are summarized in Appendix Table H.2. Appendix Table H.2: Coping Strategies against Increases in Heat Tariffs Preferred coping strategies Households without Thermal Households with Thermal against tariff increases Renovation Renovation Billing for actual consumption 77.4 73.3 of heat Control over room 77.4 67.4 temperature Installation of heat control 48.8 40.7 and cost allocation device Source: Authors. H.3 Willingness to pay for thermal retrofits Households without thermal renovation were asked about their willingness to pay for thermal retrofits. Of the 83 respondents, 58.3 percent said they were willing to pay for some part of thermal renovations to their buildings. When given a more specific scenario which asked if households were willing to pay for 60 percent of the thermal retrofit, using Lithuania as an example, 47.6 percent of households said that they were willing to pay. As a follow up question, households were asked if they would be in favor of a scheme where they could pay off the cost of the thermal renovation over 10 – 20 years, 61.9 percent said yes. Respondents were finally asked about their willingness to pay installments each month. First, respondents were asked if they were willing to pay 5000BYR/m2 a month, over a period of 15 years, 40.5 percent said ‘yes’. If respondents said yes, enumerators asked if they were willing to pay 7000BYR/m2/month. About 40 percent of the respondents who said ‘yes’ to BYR 5000/m2/month said ‘yes’. If they said no to BYR 5000/m2/month, enumerators asked if they were willing to pay 3000BYR/m2/month. Amongst the 51.2 percent that said no to BYR 5000/m2/month, 39.5 percent agreed to BYR 3000/m2/month. The results of this survey are shown in Appendix Figure H.1. Where figures do not add up to 100 percent, a portion of respondents have refused to answer the question. 98 Appendix Figure H.1: Willingness to Pay for Thermal Renovations Source: Authors. Constraints on paying a higher tariff Amongst households in buildings without thermal renovation, 42.9 percent said that they were unwilling to pay more than indicated for thermal retrofits because they could not afford it. In households that received thermal retrofits, the main reason cited was lack of information on the specific cost of the equipment, followed by high costs. Respondents who were of pension age stated that they are hesitant to take on long-term loans. Perceived benefits of thermal retrofits The benefits that households foresee in receiving thermal benefits are as follows from the most important to least important: Improved thermal comfort, improved building asset value, and reduced heating costs. Seventy four percent of respondents saw improved thermal comfort as key benefit of thermal retrofits while only 40.5 percent saw reduced energy bills as a key benefit. Drawbacks foreseen also in order of importance are: High cost and inconvenience of having the work done. Household access to credit Respondents from buildings without thermal renovations were asked about their borrowing preferences. About 54 percent of respondents stated that they have borrowed money from a bank, or friends and family. Amongst these respondents, 80 percent had applied to a bank for a loan, and 20 percent borrowed from friends and family. These funds were mostly spent on consumer goods, and mortgages. H.4 Feedback on thermal retrofits Amongst household that lived in household that have had thermal retrofits, 74.4 percent experienced improvements in thermal comfort. In addition, 53.5 percent of respondents whose 99 buildings received renovations said they perceived improved market value of their apartment and a 9.3 percent reduction in their heating bills. A majority of respondents were satisfied with the implementation process of thermal retrofits but also had suggestions for future renovations. Some suggestions include increasing household awareness about EE, and improvements to the quality of renovation. H.5 Household Demographics Appendix Table H.3 below summarizes the demographics of the sample. Appendix Table H.3: Summary of Sample Demographics Buildings without Thermal Buildings with Thermal Renovation Renovations % Sex Male 21.7 39.5 Female 78.3 58.1 Level of Education Secondary/Technical 47.6 36.1 University 41.7 51.2 Post-graduate 4.8 3.5 Employment Status Employed 44.0 43.0 Unemployed/Pension Age 54.8 53.5 Source: Authors. H.6 Building Characteristics of Sample Appendix Table H.4, 100 Appendix Table H.5 and Appendix Table H.6 provide an overview of the buildings surveyed. Appendix Table H.4: Characteristics of Buildings Surveyed Households without Households with thermal thermal renovation renovation Buildings built before 1970 53.6% 47.7% 1970 to 1979 6.0% 10.5% 1980 to 1989 32.1% 14.0% 1990 - 1995 7.1% 23.3% Did not answer 1.2% 4.5% Source: Authors. 101 Appendix Table H.5: Primary Material of Building Households without Households with thermal thermal renovation renovation Brick 56.0% 44.2% Concrete 42.9% 47.7% Other - 3.5% Did not answer 1.2% 4.6% Source: Authors. Appendix Table H.6: Building Type by Number of Floors Households without thermal Households with thermal renovation renovation Low-rise (1–3 floors) 21.4% 5.6% Mid-rise (4-5 floors) 64.3% 69.8% Multi-floor (6-9 floors) 8.3% 22.1% Increased number of floors 6% - (10-16 floors) High-rise (more than 17 floors) - - Did not answer - 2.3% Source: Authors. 102 Appendix I: Summary of In-depth Interview Results Interviews were conducted with public building stakeholders to understand their attitudes toward adopting new financing and delivery models for thermal retrofit in Belarus. Interviews were also conducted with contracting companies with experience implementing thermal retrofits in order to assess their capacity for handling more thermal retrofits and to understand their perceptions of barriers or problems in the retrofit process. Section I.1 contains information from the interviews with public building stakeholders. Section I.2 contains information from the interviews with thermal retrofit contractors. I.1 Interviews with Public Building Stakeholders Public building stakeholders interviewed as part of this study include representatives of hospitals in Baronovichi; representatives of hospitals, schools and Housing and Utilities in Smolevichi; and representatives from Novopolotsk. Willingness to participate in a thermal retrofit program Participants were asked whether their cities would be willing to participate in a program that allowed budget-supported entities to use their energy savings to pay for the costs of thermal retrofit. Respondents from Smolevichi all expressed their willingness to take part in such a program. Respondents in Baranovichi and Novopolotsk stated that such a program is not possible given current Belarus law that requires energy payments to be made according to actual metered consumption, and for all payments to be made via the Treasury. The Baranovichi respondents believed they would be willing to participate in such a program if adjustments for the duration of the heating season, new equipment startup and temperature factor would be taken into account. Perceptions of ESCO participation in a thermal retrofit program Participants were also asked about ESCOs, and whether schools and hospitals would be willing to pay an ESCO on a monthly basis the equivalent of the heating bills before renovation over 10 years, thus paying for the renovation. The ESCO would guarantee the level of energy services. Several respondents from Smolevichi explained that they have insufficient funds to participate in such a program. Respondents from Novopolotsk said that such a program might work for businesses, but not entities funded from the city budget, where accumulation of funds is impractical. Respondents from Baranovichi also said it was impractical, as the hospital there carries out EE measures on its own. The representatives of Housing and Utilities in Smolevichi said that much would depend on the ESCO, and whether it would provide high quality services throughout the contract period. They also wondered who would monitor the contract, and who would be responsible for losses due to inflation over the course of the contract. I.2 Interviews with Thermal Retrofit Contractors Thermal retrofit contractors interviewed as part of this study to understand local capacity to undertake thermal retrofits. Representatives of nine companies in Minsk, Baranovichi, Novopolotsk and Smolevichi were interviewed. 103 Past renovation projects Contractors were asked how much thermal renovation work they had done over the period from 2012 to 2014. Answers that were given in total area ranged from 560 m 2 for a company in Smolevichi to over 50,000 m2 for two companies in Minsk. A Baranovichi company carried out major upgrades in eight buildings. A company in Novopolotsk reconstructed the main and obstetrical units of the Central City Hospital. Contractors were also asked how much thermal renovation they could implement in one year. A Smolevichi company answered only 250 m2 of thermal renovation per year. One Minsk company answered between 20,000 and 25,000 m 3. Two other Minsk companies had answers ranging from 25,000 to 35,000 m 2. A state-owned company replied that could retrofit as much as 102,000 m2 per year. Perceptions of M&V institutions, and payment processes Contractors were asked whether the responsible municipal agency carried out inspections to guarantee the quality of repair work. Six of the eight contractors who answered the question said yes. A Novopolotsk company identified the agency that carried out the inspection but said that it was “not adequately principled.” A Smolevichi contractor replied that no inspection had been done, but the residents were satisfied with the work. Six contractors provided answers to a question on the timeliness of contractual payments. Three reported that payments were made on time, according to the contract schedule. The other three respondents said that 70 to 80 percent of payments were on time, with two to three month delays for the remaining payments. Common problems faced while undertaking thermal retrofits Respondents were asked what problems or issues they have faced in reconstruction projects so far. One company in Minsk cited the fact that unplanned work might come up during a renovation and require additional costs and certificates. Another Minsk company said that omissions in design for some types of work was a problem. Another company cited the insufficiency and inadequacy of regulations on design and use of construction materials and technology. They also said that low awareness among designers, developers and contractors was a problem that resulted in lack of trust. Finally, a company in Novopolotsk cited construction quality, workplace discipline and site management. The quality and availability of insulation materials and new windows were assessed by six respondents. All said that the quality was adequate and compliant with standards. 104 Appendix J: Calculating the Potential of ESM Packages for Public Buildings The methodology for determining the potential of ESM packages in public buildings is identical to that of residential buildings, as described in Appendix F. This appendix provides the inputs needed to apply that methodology to public buildings. Section J.1 provides tables for total annual consumption for each public building type. Section J.2 provides tables for potential energy savings of the packages in public buildings. Section J.3 provides tables showing total investment costs (CAPEX) in public buildings. Section J.4 provides tables needed to create supply curves for public buildings. J.1 Public Sector Annual Consumption Tables In public buildings, baseline consumption is given in heated volume (in kWh/m 3), rather than floor area. As with residential buildings, in order to determine how much energy savings the ESM packages could achieve, baseline consumption numbers were adjusted to a more realistic internal temperature of 23C. Appendix Table F.1 shows the baseline and adjusted baseline for public buildings. Appendix Table J.1: Baseline and Adjusted Baseline Consumption in Public Buildings Baseline Consumption Baseline Adjusted to Internal Temperature of Building Type (weighted average, kWh/m3) 23C (weighted average, kWh/m3) Educational 59 84 Health 43 61 Administrative 34 48 Source: Authors. Appendix Table J.2 shows the total consumption for each building type. Appendix Table J.2: Total Annual Consumption in Public Buildings Adjusted Total Heated Number of Average Heated Total Annual Baseline Volume Building Type Buildings Volume per Consumption Consumption (thousand (thousands) Building (m3) (GWh) (kWh/m3) m3) Educational 84 46,514 4,619 10,070 3,908 Health 61 21,623 1,718 12,586 1,310 Administrative 48 31,490 1,841 17,105 1,504 Source: Authors. 105 J.2 Public Sector Energy Savings Potential Tables The percentage of potential energy savings of each individual ESM (installation of TRVs; replacement of windows; and insulation of walls and roofs) were estimated. Appendix Table J.3 shows the weighted average percentage savings for each type of building. Appendix Table J.3: Relative Energy Savings from Implementation of ESMs, Public Window Replacement Wall and Roof Building Type TRV Savings Savings Insulation Savings Educational 9.3% 11.5% 35.5% Health 9.3% 11.8% 35.7% Administrative 5% 12.9% 37.9% Source: Authors. Appendix Table J.4 shows the calculations for the potential annual energy savings of each ESM. Appendix Table J.4: Potential Annual Energy Savings of Individual ESMs, Public Total Annual Potential Annual Relative Savings Building Type Consumption ESM Energy Savings by ESM (%) (GWh) (GWh) TRVs 9.3% 363 Educational 3,908 Windows 11.5% 451 Walls and Roofs 35.5% 1,389 TRVs 9.3% 122 Health 1,310 Windows 11.8% 155 Walls and Roofs 35.7% 468 TRVs 5% 75 Administrative 1,504 Windows 12.9% 194 Walls and Roofs 37.9% 570 Source: Authors. The energy savings of the individual ESMs are combined into packages in Appendix Table J.5. These packages assume that TRVs are installed first; savings from window replacement and wall and roof insulation take into account the prior savings from TRVs. 106 Appendix Table J.5: Potential Annual Energy Savings of ESM Packages, Public Package Building Type Annual Savings, GWh Educational 363 End-User Heat Control Health 122 Administrative 75 Educational 771 Simple Renovation Health 262 Administrative 260 Educational 2,030 Deep Renovation Health 686 Administrative 801 Source: Authors. J.3 Public Sector CAPEX Tables The unit cost of each measure (the cost per TRV and allocator, the cost per m2 of window area and the cost of insulation per m2 of wall area and roof area) are identical to those for residential buildings. This is shown in Appendix Table F.7. The wall area, roof area, window area and number of heaters for each type of building are shown in Appendix Table J.6. Appendix Table J.6: Number of Heaters and Area of Walls, Roofs and Windows by Public Building Type Building Type Number of heaters Window area Roof area Wall area (thou.) (thousand m2) (thousand m2) (thousand m2) Educational 1,104.56 2,468.89 5,624.03 7,026.82 Health 531 862.29 1,658.3 2,586.87 Administrative 759 1,233 1,897 3,699 Source: Authors. Appendix Table J.7 shows the investment costs for individual ESMs. 107 Appendix Table J.7: CAPEX for Individual ESMs by Public Building Type Unit Cost Value* Total CAPEX Building Type ESM Relevant Unit (USD) (thousands) (million USD) TRVs 26 # heaters 1,104.56 28.72 Window 230 Window area, m2 2,468.89 567.85 Educational replacement Wall/Roof 94 Wall area, m2 7,026.82 846.11 Insulation 33 Roof area, m2 5,624.03 TRVs 26 # heaters 531 13.81 Window 230 Window area, m2 862.29 198.33 Health replacement Wall/Roof 94 Wall area, m2 2,586.87 297.89 Insulation 33 Roof area, m2 1,658.3 TRVs 26 # heaters 759 19.73 Window 230 Window area, m2 1,233 283.59 Administrative replacement Wall/Roof 94 Wall area, m2 3,699 410.31 Insulation 33 Roof area, m2 1,897 Note: * For walls and roofs, the top number represents walls and the bottom number represents roofs. Source: Authors. Appendix Table J.8 shows the CAPEX for the ESM packages. Simple and Deep Renovation both include twice the cost of End-User Heat Control, because TRVs need to be replaced after 10 years. Appendix Table J.8: CAPEX for ESM Packages by Public Building Type Package Building Type CAPEX (million USD) Educational 28.72 End-User Heat Control Health 13.81 Administrative 19.73 Educational 625.28 Simple Renovation Health 225.94 Administrative 323.06 Educational 1,471.4 Deep Renovation Health 523.83 Administrative 733.37 Source: Authors. 108 J.4 Public Sector Supply Curve Tables The assumptions used to calculate the levelized cost of energy saved are the same as for residential buildings, except for discount rate used (Appendix Table J.9). Appendix Table J.9: Key Assumptions for Supply Curves in Public Buildings Parameter Assumption Discount rate 12.45% (based on Government of Belarus 1-year bond yield as of June 2015) Asset life 20 years for insulation and windows 10 years for TRVs and allocators Construction period 1 year Tariff for supply by MHU (natural gas) 0.07739 USD/kWh Source: Authors. The levelized cost for each building type for each package is shown in Appendix Table J.10. Appendix Table J.10: Levelized Cost for Each Package by Public Building Type CAPEX (million Annual Savings Levelized Cost Package Building Type USD) (GWh) (USD/kWh) Educational 26.51 363 0.01424 End-User Heat Health 13.81 122 0.02043 Control Administrative 19.73 75 0.04730 Educational 597.01 771 0.11164 Simple Renovation Health 225.94 262 0.11872 Administrative 323.06 260 0.17131 Educational 1,407.59 2,030 0.09981 Deep Renovation Health 523.83 686 0.10509 Administrative 733.37 801 0.12602 Source: Authors. Appendix Table J.11 ranks the building types by levelized cost for each package, and calculates the cumulative annual savings. 109 Appendix Table J.11: Cumulative Annual Savings for Each Package, Public Levelized Cost Cumulative Annual Package Building Type (USD/kWh) Savings (GWh) Educational 0.01424 363 End-User Heat Control Health 0.02043 485 Administrative 0.04730 561 Educational 0.11164 771 Simple Renovation Health 0.11872 1,033 Administrative 0.17131 1,293 Educational 0.09981 2,030 Deep Renovation Health 0.10509 2,716 Administrative 0.12602 3,517 Source: Authors. A supply curve was made for Deep Renovation using low-cost financing to make it financially viable. To do this, a levelized cost was calculated using a 2.07 percent rate in place of the 12.45 percent discount rate used in the other supply curves (Appendix Table J.12). Appendix Table J.12: Calculations for Deep Renovation in Public Buildings with Low-Cost Financing and Capital Subsidy CAPEX Levelized Cost with Annual Savings Cumulative Annual Building Type (million 2.07% rate (USD/kWh) (GWh) Savings (GWh) USD) Educational 1,407.59 2,030 2,030 0.04464 Health 523.83 686 2,716 0.04700 Administrative 733.37 801 3,517 0.05636 Source: Authors. 110 Appendix K: Estimated Fiscal Cost and Effectiveness of Expanding Social Protection Mechanisms in Belarus Appendix Table K.1: Benefit Coverage, Targeting Accuracy and Fiscal Cost of GASP and H&U Benefits Benefit Targeting Budget per year, % coverage accuracy GDP 2015 2017 2015 2017 2015 2017 1st decile 52 51 42 41 0.43 0.36 Expand GASP 2nd decile 48 52 21 24 0.22 0.22 (20% of 3rd-10th population) deciles 12 12 37 35 0.38 0.31 Total 20 20 100 100 1.03 0.89 Expand GASP 1st decile 100 100 59 59 0.26 0.25 (10% of 2nd decile 81 83 20 23 0.09 0.1 population)+ Top 3rd-10th up GASP (10% of deciles 2 2 21 18 0.09 0.08 population) Total 20 20 100 100 0.44 0.43 1st decile 5 21 48 25 0.002 0.01 2nd decile 1 10 15 12 0.001 0.01 Old H&U benefit 3rd-10th deciles 1 5 37 63 0.002 0.03 Total 1 7 100 100 0.005 0.05 1st decile 27 61 84 60 0.012 0.04 2nd decile 3 18 12 16 0.002 0.01 Refined H&U 3rd-10th benefit deciles 0 3 5 25 0.001 0.02 Total 3 10 100 100 0.014 0.07 Source: World Bank, “Heat Tariff Reform and Social Impact Mitigation: Recommendations for a Sustainable District Heating Sector in Belarus”, 2014. 111 Appendix L: Heat Consumption of Housing Stock by Standard Series of Residential Buildings Baseline Actual parameter of Relative Building Description Estimated parameter of specific heat deviation Type specific heat consumption consumption for between actual for heating and heating and and estimated ventilation, kWh/(m²·year) ventilation, value,% kWh/(m²·year) Separate standalone wooden buildings - one floor 288.6 - - Type 1 - 2-3 floors 192.8 - - 2 floors standalone buildings - brick 181.7 141.0 22% Type 2 - concrete blocks 181.3 141.0 22% 3 floors multi-apartment buildings - brick 184.6 181.5 2% - concrete blocks 184.6 181.5 2% Type 3 - concrete panels 184.6 181.5 2% 5 floors multi-apartment buildings - brick 138.7 128.9 7% Type 4 - concrete blocks 138.7 128.9 7% 5 floors multi-apartment buildings - concrete panels 138.7 128.9 7% Type 5 - modular blocks 138.7 128.9 7% 9 floor brick multi-apartment 125.1 8% Type 6 buildings 136.5 9 floor multi-apartment buildings - concrete panels with thermal resistance coefficient 125.1 8% below 2,4 136.5 Type 7 - modular blocks 136.5 125.1 8% 9 floor multi-apartment buildings with thermal 81.7 - - resistance coefficient above Type 8 2,4 12 floor multi-apartment buildings - concrete panels 135.8 119.7 12% Type 9 - modular blocks 135.8 119.7 12% Type 10 12 floor multi-apartment 112 Baseline Actual parameter of Relative Building Description Estimated parameter of specific heat deviation Type specific heat consumption consumption for between actual for heating and heating and and estimated ventilation, kWh/(m²·year) ventilation, value,% kWh/(m²·year) buildings - brick 135.8 119.7 12% - monolithic 135.8 119.7 12% 113