Survey of Funds Available for Energy Efficient and Renewable Energy

Survey on funds available forenergy efficiency and renewable energyA tool for the BSPC Working Group on Energy and Climate ChangeCompiled by Peep MardisteThe survey has been prepared on request of the Energy and Climate Change WorkingGroup of the Baltic Sea Parliamentary Conference (BSPC). The survey is aiming atproviding brief background information for working group members on existinginternational financial instruments for energy efficiency and renewable energyinvestments in the Baltic Sea region and to suggest possible recommendations on howto strengthen such funding instruments.October 2008Survey on funds available forenergy efficiency and renewable energy1. BackgroundAs the occurring of climate change is becoming unquestionable and scientifically proven,there is growing need for practical activities in order to minimize the scope and impacts ofthe climate change. Even though the international negotiations for post-2012 climate treatyare still ongoing, there is enough certainty about continuation of international efforts so thatinvestments can be made already now. Those countries of the Baltic Sea region belonging tothe European Union are already guided by the goal of reducing greenhouse gas emissions by20% by year 2020 as agreed upon at the European Council in March 2007. RussianFederation has also ratified the Kyoto Treaty, showing willingness to join internationalefforts to combat climate change. But besides threatening climate change there are indeedother reasons to invest into energy efficiency and renewable energy such as economicbenefits and decreased dependency on energy import. It’s estimated that with currentpolicies, European energy demand will grow at 1.2 percent a year to 2020 (1.7% in North-Eastern Europe). A study by KcKinsey from September 2008 however reveals that Europecould hold energy demand at today’s levels if it uses the existing energy saving potential.12. Scope of the surveyThere are numerous potential funding sources for investments for energy efficiency andrenewable energy. While most of the relevant investments are done by private sector, it willnot be in focus of current overview. In framework of BSPC’s work the potential sources offunding for public sector projects will be looked at instead. The survey does not go intodetails on what are the conditions of different financial institutions vis-à-vis funding ofprojects. Instead its will provide general overview and recommendations which would enablemembers of parliaments from Baltic Sea region to make suggestions for changes needed toexecutive or potential local level beneficiaries of the investments.The overview covers existing international financial instruments available for public sector insome or all countries around the Baltic Sea. Recipient of such funding could be national,regional or local government directly or entities controlled by those institutions. As most ofthe funding sources covered give grants, loans or technical assistance to projects of bothenergy efficiency and renewable energy, the overview is given fund-by-fund basis.Recommendations for strengthening of international financial instruments for energyefficiency and renewable energy investments in the Baltic Sea region are outlined at the endof survey.3. International financial instruments for energy efficiency and renewables3.1. EU programs(a) Baltic Sea Region ProgrammeBaltic Sea Region Programme 2007-20132 is a programme under European Terrotorial Co-operation Objective and European Neighbourhood and Partnership Instrument. With totalbudget of 237 million EUR it is built on earlier experience of 1997-1999 Interreg IIC and1 See www.mckinsey.com/mgi/reports/pdfs/capture_europe_energy/capture_europe_energy.pdf2 See http://eu.baltic.net22000-2006 Interreg IIIB. While being mostly targeted at territorial cohesion and cross-bordercooperation, the projects of energy efficiency and renewable energy can get funding iffulfilling necessary criteria. Programme has priority 1 for fostering of innovations whichforesees for example implementation of transnationally relevant innovations in SMEs such aspromotion and transfer of knowledge in alternative and renewable energy managementpatterns, environmentally sound and eco-efficient technology. Aimed at competitive citiesand regions, the priority 4 allows funding of urban-rural partnership projects for joint energysavings, alternative and renewable energy management. The programme has set target offinancing 5 renewable energy projects (worth of total some 8 million EUR) and 3 energyefficiency projects (worth of some 4 million EUR) by 2013 as an indicator of success.(b) Competitiveness and Innovation Programme (CIP)Competitiveness and Innovation Programme (CIP) is a new framework for EU funding in2007-2013. The CIP contains two important programmes relevant to energy efficiency,Intelligent Energy Europe (IEE) programme and Entrepreneurship and InnovationProgramme.With total budget of 730 million EUR for 2007-2013, the Intelligent Energy Europe (IEE)3 isperhaps the only specialized source of funding for energy efficiency and renewable energy inthe EU. The IEE uses local and regional energy agencies as a tool to support the transition tomore sustainable energy systems. Regional agencies are to spread management practices,provide information guidance and offer a range of services based on specific local needs.More than 60 new energy agencies have been set up with support of Intelligent EnergyEurope since 2004. They add to about 200 agencies set up under SAVE II, the predecessor ofthe IEE programme. Baltic Sea region hosts several of those regional energy agencies, inFinland (Lapua), Latvia (Riga), Germany (Lüchow-Dannenberg), Denmark (Samso) andSweden (Värmland). IEE also incorporates earlier work of ALTENER, the only EUprogramme that focused exclusively on the promotion of renewable energy. IEE programmeis managed by the Executive Agency for Competitiveness and Innovation (EACI) on behalfof the European Commission.The Entrepreneurship and Innovation Programme (EIP)4 has budget of 2.17 billion EUR for2007-2013. One of its five actions is to support "eco-innovation". Funding is organizedthrough annual project calls and the priority is given to small- and medium-sized enterprises(SMEs). Applicants and projects which demonstrate a European added value and have a highpotential for market replication are strongly encouraged. The calls for 2008 was alsoavailable for innovative, environmental-friendly projects in the area of sustainable buildingsand thus suitable for energy saving projects.(c) Interreg IVB and Interreg IVCINTERREG is a cross-border territorial cooperation programme for 2007-2013. It’s fundedunder the European Regional Development Fund (ERDF).Interreg IVB5 has a sub-programme for the North Sea region which includes Denmark,Norway, Western Sweden and North-Western Germany. Projects of renewable energy andenergy efficiency can be funded from its priority 2, "Promoting the sustainable managementof the environment." According to the Operational Program of Interreg IVB North Sea3See http://ec.europa.eu/energy/intelligent4 See http://ec.europa.eu/cip/eip_en.htm and http://ec.europa.eu/environment/etap/ecoinnovation5 See www.northsearegion.eu3Region Programme the projects which enhance environmentally responsible energyproduction practices such as production of renewable energy are eligible for funding.Interreg IVC6 is a territorial cooperation programme which covers the entire EU, as well asNorway and Switzerland. It follows on from the Interreg IIIC programme that ran from 2002-2007. Interreg IVC concentrates on exchanging experiences and good practices between localand regional actors across EU. Interreg IVC is very well suited for purposes of energyefficiency and renewable energy as both are specifically listed in the Operational Programmeamong key thematic objectives of the programme. Interregional projects on transport biofuelsand increased use of renewable energy sources for heating and cooling are among potentialactions to get support.(d) JESSICA and JEREMIEJESSICA7 is a new initiative to promote sustainable investment, and growth and jobs, inEurope’s urban areas. JESSICA is aimed at those implementing Structural Funds projectsprogrammes, providing outside expertise and access to loans, equity investments orguarantees. Urban development projects could include energy efficiency investments and canbe developed both by public, municipal or private sector enterprises. Public-privatepartnership schemes are of a special interest within the initiative.JEREMIE8 is another new initiative created by the European Union for its 2007-2013programming period. JEREMIE is aiming at promoting better access to finance for thedevelopment of micro, small and medium-sized enterprises (SMEs) in the regions of the EU.It can provide SMEs with loans, equity and technical assistance. As special emphasis is alsoto technology transfer, technology and innovation, in could include projects on renewableenergy and energy efficiency.(e) Seventh Framework Programme (FP7)The Seventh Framework Programme for research and technological development (FP7)9 isEU’s main instrument for funding research in 2007-2013. It bundles all research-related EUinitiatives together under a common roof playing a crucial role in reaching the goals ofgrowth, competitiveness and employment. Proposals for energy efficiency and renewableenergy projects can be submitted mainly under themesof environment and climate change(total budget 1.8 billion EUR) and energy (total budget 2.3 billion EUR). As the FP7 isreasearch fund, projects are to lead to new solutions and technological advances. Fundingschemes include large-scale integrating projects, collaborative projects, coordination actions,support actions and small or medium-scale research projects. Many calls for proposals havealready been launched for 2008 and 2009. Projects are aimed mainly at applicants frommember states, EU associate and candidate contries, but can involve also third countries suchas Russia. FP7 is open to any company, university, research centre or public administrationlegally established while additional conditions exist depanding on the type of project. In mostcases EU research funding through FP7 is to be sought by building a consortium in order tosubmit a project proposal in response to a call.6 See www.interreg4c.net7 See www.jessica.europa.eu8 See www.eif.org/jeremie9 See http://cordis.europa.eu/fp74(f) Structural FundsStructural Funds are channeling some 36% of the EU budget and is the main instrument ofthe regional policy. General framework for use of Structural Funds in 2007-2013programming are laid down by a special regulation and guidelines. Strategic Guidelines onCohesion 2007-2013 lists energy efficiency and renewable energy as one of the 12 priorities.The actions eligible were set up in de-centralized process and by some 450 national andregional Operational Programmes. Although the programming just ended, the EuropeanCommission estimates that Operational Programmes include investment of 4.8 billion EURfor renewable energies and 4.2 billion EUR for energy efficiency and energy managementmeasures. Project promoters shall follow the Operational Programmes of the relevant regionor member state to apply for the funding.Combined 9 billion EUR for sustainable energy would count for just some 2.6% of totalStructural Funds budget. It’s indeed an increase from estimated 1.6% of previous financialperspective of 2000-2006 but not enough to meet the climate and energy challenges that EUis facing. Many practical suggestions for increasing the presence of renewable energyprojects in Structural Funds were provided by Energy 4 Cohesion initiative.10 There havebeen proposals to increase share of sustainable energy in Structural Funds to 3.5% or 5%.Preliminary estimates by CEE Bankwatch Network11 reveal however that from the newmember states at the Baltic Sea region only Lithuania is planning to spend over 5% ofStructural Funds for efficient and renewable energy. Estimations were 2.6% for Latvia, 2.2%for Estonia Estonia and 1.7% for Poland.3.2. Funds for cooperation between EU and RussiaAccording to the EBRD, Russia could save 35-40% of its current annual energy consumptionthrough improved efficiency. There is huge energy saving potential and plenty ofopportunities for cooperation and investments for international financial agencies. Russianeconomy is currently extremely energy-intensive, using 3.2 times more energy to produceeach unit of GDP than EU. It’s also national priority as the official Russian energy strategyenvisages a 45% reduction in energy intensity by 2020.The main framework for EU funding for projects in Russia consists of Annual ActionProgrammes under the European Neighbourhood and Partnership Instrument (ENPI).Perhaps the key EU-funded project on energy efficiency is support to EU-Russia EnergyTechnology Centre.12 The centre was established as an initiative identified within theframework of the ongoing EU-Russia Energy Dialogue. The centre promotes the use ofefficient and environmentally friendly technologies through support in preparation ofbankable projects in the energy sector and providing technical assistance for projectproposals, feasibility studies and other papers on energy efficiency. EU-Russia EnergyTechnology Centre cooperates with partners in federal, regional and municipal levels. Centreis of a political interest to the EU as it explores possibilities to use Kyoto mechanisms for theattraction of foreign investments into energy efficiency projects. Boosting energy efficiencythrough such centre is perhaps more cost effective for the EU than identifying and fundingindividual investments projects.10 See www.e4c.org11 See www.europarl.europa.eu/meetdocs/2004_2009/documents/dv/pe389590_/pe389590_en.pdf, pages 37-4012 See www.technologycentre.org5Another important mechanism that can be used for promoting cooperation between EU andRussia on energy efficiency in Northern Dimension Environmental Program (NDEP).13Launched in 2001, the NDEP is an international framework for financing priorityenvironmental projects in north-west Russia. It combines resources and expertise not justfrom the European Commission, but also from EIB, EBRD, NIB, World Bank and RussianFederation itself. Each project has an assigned financing institution (EBRD, EIB, NIB orWorld Bank) acting as lead implementing agency. Energy efficiency is one of the sectorseligible for NDEP funding. For example the district heating rehabilitation projects ofKaliningrad and Murmansk were funded under NDEP, aiming at reducing the emissions andenergy losses. So far the NDEP consists of a 2.4 billion EUR pipeline of projects.3.3. European Investment Bank (EIB)European Investment Bank (EIB) is an investment bank of the European Union. While itsoriginal aim was to provide lending for economic and social cohesion in the EU memberstates, it also lends to other countries across the world. Recently it started operating also inRussia. EIB provides either direct loans to individual projects or intermediated loans troughcommercial banks to help them to provide finance to SMEs. While in energy sector the EIBis lending total some 4 billion EUR annually, it has set a target of lending at least 800 millionEUR annually for renewable energy projects. 14 The Bank also wants 50% of its lending toelectricity generation to be associated with renewable energy technologies. While the EIBprovides typically up to 50% of project costs than in case of renewable energy projets EIBloan can cover 75% of total projects costs.3.4. European Bank for Reconstruction and Development (EBRD)European Bank for Reconstruction and Development (EBRD) is a regional developmentbank providing loans and equity investments for both public and private sectors. In the BalticSea region the Bank operates in Russia, Estonia, Latvia, Lithuania and Poland. It’s so far theonly international financial institution with a specialized energy efficiency team.15 EBRD canprovide loans for energy efficiency projects and assist its clients to identify and developenergy efficiency opportunities within their operations. In May 2006 the EBRD launched theSustainable Energy Initiative (SEI). The SEI is focused on enhancing energy efficiency in theindustrial power and municipal infrastructure sectors developing renewable energy suppliesin the EBRD countries of operations. Through the SEI the EBRD scaled up its sustainableenergy investments to some 2 billion EUR between 2006 and 2008. Bank has also set aspecific target to lend or invest a total 1 billion EUR in energy efficiency and renewableenergy projects in 2006-2010.It shall be underlined that EBRD provides loans to projects of a significant scale which saveenergy. Those projects can concern energy generation, transmission/distribution or end-use.Among other priorities within energy efficiency sector the Bank supports energy servicecompanies’ (ESCO) projects which target social facilities, such as schools or hospitals.EBRD also provides loans for rehabilitation of district heating infrastructure. Bank’s projectsmust provide the least-cost solution, technology must be well proven and projects shall befinancially viable. However in certain circumstances the project revenues can includesubsidies paid by a public entity. Although the Bank demands that its projects have internalrate of return at around 10%, it also states that in case of district heating projects the tariffsmust remain affordable or a social safety net shall be set up to protect lower income groups.13 See www.ndep.org14 See www.eib.org/projects/topics/environment/renewable-energy15 See www.ebrd.org/country/sector/energyef6Detailed information on sectors and activities available for funding are described in Bank’s2006 Energy Operations Policy.16 EBRD has launched a dedicated website to support therenewable energy sector: www.ebrdrenewables.com.3.5. Nordic Investment Bank (NIB)Nordic Investment Bank (NIB)17 is a multilateral bank belonging to Nordic and Baltic States.While main attention of its lending activities is strengthening of economic cooperationbetween its member countries, the Bank also operates in Poland and Russia from the BalticSea region. So far energy sector projects account for 27% of NIB’s portfolio of loansoutstanding. NIB does recognize climate change as an important challenge while decidingwhich projects to join. Its energy efficiency projects include a 10 million EUR credit line at2002 for financing of energy efficiency investments in public buildings. In February 2008 theBank launched a new climate change, energy efficiency and renewable rnergy lendingfacility. The facility aims at supporting its member countries and neighboring region in theefforts to secure the long-term energy supply and has earmarked budget of 1 billion EUR.3.6. Nordic Environment Finance Corporation (NEFCO)Nordic Environment Finance Corporation (NEFCO)18 is an international financeinstitution established by the Nordic countries. From the Baltic Sea region it financesprojects with positive environmental effects in Estonia, Latvia, Lithuania and Russia.NEFCO's activities are focused on projects that achieve cost-effective environmental benefitsacross the region. NEFCO can provide loans, guarantees, equity investments and technicalassistance. While it requests that projects are indeed economically, financially andtechnically viable, it does not use standard application formats to ensure flexibility. NEFCOadministers the Nordic Environmental Development Fund (NMF) which is perhaps mostrelevant for energy efficiency projects. It includes Energy Savings Programme and EnergySavings Credit Facility that can give loans and conditional grants for small energy efficiencyinvestments. Such projects are often directed to energy saving in social objects such asschools, hospitals or street lighting.Table 1. Availability of funds for energy efficiency in countries from Baltic Sea regionRU EE LV LT PL DE DK SE FI NO ISEU: Baltic Sea Region G G G G G G G G G GProgrammeEU: Competitiveness and G G G G G G G G G GInnovation ProgrammeEU: Interreg IVB G G G GEU: Interreg IVC G G G G G G G G GEU: JESSICA and JEREMIE L,E L,E L,E L,E L,E L,E L,E L,EEU: Seventh Framework G G G G G G G G G G GProgrammeEU: Structural Funds G G G G G G G GEU-Russia cooperation L,GfundsEIB L L L L L L L L L L LEBRD L,E L,E L,E L,E L,ENIB L L L L L L L L L L LNEFCO L,E L,E L,E L,E L,E L,E L,E L,E L,EE-equity investment, G-grant, L-loan16 See www.ebrd.com/about/policies/sector/energy.htm17 See www.nib.int18 See www.nefco.org74. Recommendations for strengthening of international financial instruments for energyefficiency and renewable energy investments in the Baltic Sea regionIn order to face the challenge posed by climate change one needs to adjust and strengthen thefinancial instruments available for renewable energy and energy saving projects. Some of thepractical suggestions are outlined below fund-by-fund. However the biggest impacts can beachieved with right policy decisions. Additional grant funding or loan schemes to SMEs areneeded, but mostly voluntary action for climate change isn’t enough. Comprehensive set ofpractical suggestions for EU level policy change is given in a November 2006 study byAachen Foundation.19 Results of the major review of energy efficiency policies, published inJanuary 2008 by World Energy Council20 concludes that more widespread use tax incentivesfor energy efficiency can be among the most effective measures. Revision of the EU energytax directive could be one of the process to make it happen.Reduced VAT on eco-friendly products, ban of incandescent light bulbs, strengthening ofminimum energy efficiency performance for various appliances such as water heaters,computers and stand by functions are among variety of practical choices to be made. One ofthe key targets shall be housing sector as buildings are the biggest source of greenhouse gasemissions in the EU. The revision and strengthening of the Energy Performance in BuildingsDirective (EPBD) could be needed to further the energy efficiency standards for buildings.It’s vital that the European Union continues to play central role in international negotiationsfor post-Kyoto climate regime. For broad international agreement to be reached, EU shallproactively adopt 30% greenhouse gas reduction target rather than sticking to current targetof 20% reduction by 2020.Financial mechanisms of the European Union• The ongoing EU budget review process provides excellent opportunity to find extrafinancial means for promotion of speedy action for sustainable energy. In parallel topotential reduction of the funding for Common Agricultural Policy (CAP) a newspecial fund for fighting the climate change and inceasing of energy security is needed.Such fund could help to co-finance energy efficiency and renewable energy projects, aswell as developing of international energy connections and Trans-European EnergyNetworks (TEN-E).• While monitoring the implementation of the EU Structural Funds for 2007-2013 theCommission and Member States shall indicate the share of projects carried out insectors of energy efficiency and renewable energy and if needed, increase relevantallocations.• While drafting and negotiating the Regulation for use of EU Structural Funds for 2014-2020 earmarking of certain percentage of funds in all eligible regions for energyefficiency and renewable energy projects shall be considered.Funds for cooperation between EU and Russia• In context of Baltic Sea region it’s important that EU continues and increases support toenergy efficiency initiatives in Russia within ENPI. Individual EU member states from19 See http://www.aachener-stiftung.de/downloads/factorx_2nd.pdf20 Seewww.worldenergy.org/publications/energy_efficiency_policies_around_the_world_review_and_evaluation/1166.asp8Baltic Sea region could also consider earmarking additional funds for concretepartnerships on energy efficiency such as EU-Russia Energy Technology Centre.EIB• In order to re-direct its attention from fossil fuels the EIB shall adopt a policy of nosupport to oil projects while gradually phasing out also gas and coal projects.• Prior to the approval of any project, the EIB shall review related energy efficiencyissues and ensure that an energy audit is undertaken.EBRD• EBRD shall revise its energy policy to ensure emphasis on energy efficiency and set upgradually increasing targets for investments into energy efficiency, reaching forexample earmarking of 50% of all lending in the power sector to increasing energyefficiency.• EBRD shall revise its energy policy in order to set up targets for the financing ofrenewable energy projects, for example allocating 50% of all lending in the powersector in current or future EU Member States to renewable energy.• In order to re-direct its attention from fossil fuels the EIB shall adopt a policy of nosupport to oil projects while gradually phasing out also gas and coal projects.• Prior to the approval of any project, EBRD shall review related energy efficiency issuesand ensure that an energy audit is undertaken.NIB• While NIB lends typically up to 50% of the project costs it shall consider adopting apolicy of increasing its share of financing in case of renewable energy and energyefficiency projects to 80% or 90%.• In order to re-direct its attention from fossil fuels the NIB shall adopt a policy of nosupport to oil projects while gradually phasing out also gas and coal projects.• Prior to the approval of any project, NIB shall review related energy efficiency issuesand ensure that an energy audit is undertaken.Peep Mardisteenvironmental policy expertphone: +372 5078111e-mail: pepe@ut.ee9