World Bank Approach to Financing Heating Infrastructure – Europe and Central Asia (ECA) Region

Presentation at Conference on Heating Sector Institutional Reform in the FSU Baku, October 21, 2005

Typical Approaches to Heating Sector Improvements  Institutional reform, pricing, subsidy restructuring  Supply-side upgrades, system conversions  Demand-side improvements through financial intermediation and/or energy service company (ESCO) models

World Bank Study – Coping with the Cold  Survey data from Armenia, Croatia, Kyrgyz Republic, Latvia, Lithuania, Moldova and Tajikistan  Study focused on both district heating and individual solutions based on electricity, fossil fuels and fuelwood  Included willingness-to-pay surveys in several countries

Coping with the Cold, Challenges

 Inability to regulate individual demand in DH systems. Over- and under-heating is frequent  Heating infrastructure is deteriorating due to under-investment and mismanagement  Low collection rates - unable to disconnect non-payers  Many networks fully or partly abandoned  Consumers substitute with dirty energy

Coping with the Cold, Poor vs. Non-Poor  Non-poor people spend $30-50 per year on heat  Poor people spend $25-40 per year on heat  The non-poor has better quality of heating with fewer adverse health consequences  poor people’s heat demand is quite unelastic – this means that if DH prices go up and they can not control demand, they cannot and will not pay for service

Coping with the Cold – Conclusions (1)  Heating systems should only be modernized in high-density areas where DH is cost competitive  Block heating and building-level solutions based on natural gas may be feasible if home owners can organize themselves  Targeted subsidies may be needed to avoid welfare losses for the poorest DH costumers if tariffs become cost-reflective

Coping with the Cold – Conclusions (2)  Policies and investment framework must allow poor people to opt in or out  Targeted vouchers for equipment and possibly fuel may be promising instruments  In bigger networks lifeline tariffs can be effective  Targeted subsidies may be needed to avoid welfare losses for the poorest DH costumers if tariffs become cost-reflective  Network investments must be coupled with metering and control options

Ongoing WB EE Projects in CEE

 Lithuania (GEF)  Poland (IBRD and GEF)  Croatia (IBRD and GEF)  Romania (GEF)  Bulgaria (GEF)  ESMAP project in Poland

Lithuania Heat Demand Management Project  Project launch: 2003  $6.5 million: VE $2.5m and VCM $4.0m

 VE Component (Dalkia): Heat regulation improvements. 75% support from Effective Energy Consumption Fund. Total planned investment: $34m.  VCM Component: Building envelope improvement through revolving fund with international fund manager

Poland EE Projects (1)

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Krakow EE Project (launched 2002)

 Recipient: MPEC, Krakow  $15 million IBRD loan, of which $7.5 million for ESCO activities  Operation of utility based ESCO (POE) as subsidiary of MPEC  Targets public sector buildings in Malapolskie Region

Poland EE Projects (2)

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Poland EE Project (launched spring 2005)

 Recipient: BGK bank and POE, Krakow  $11 million GEF Grant: $7 million for guarantee facility, $2 million for POE ESCO investments, $2 million for TA  Work through participating banks, guarantee coverage: 50-70%  Active pipeline development and support to energy audits.

Romania Energy Efficiency Fund

 Launched 2003  GEF Grant of $10 million: $8m for EE investments and $2m for TA  International Fund Manager  Debt financing only (co-financing)  Targets direct financing as well as TPF through ESCOs

Bulgaria Energy Efficiency Fund

 Launched Summer 2005  GEF grant of $10 million: $4.5m partial credit guarantee, $4.0m debt financing, $1.5m TA  Co-financed by $1.8 million from GoB and $5.75 million from bilateral donors (tbc).

 Fund will be flexible employing debt finance or guarantees as needed  International Fund Manager

Russia Municipal Heating Project

 $85m IBRD loan onlent to 5-9 city governments  General system rehabilitation  Investment support, TA and institutional support  Trend towards introducing building-level substations  Private or quasi-private operators have replaced municipal companies in a few cases  Project is ongoing and completion is expected by end of 2007