Sustainable energy initiative

One of the most important and enduring challenges in the countries of central and eastern Europe and the Commonwealth of Independent States is to address their inefficient use of energy, a legacy of the former command economy that undermines the competitiveness of enterprises and economies, threatens energy security and contributes disproportionately to carbon emissions.

The EBRD launched the Sustainable Energy Initiative (SEI) at its Annual Meeting in May 2006 to address these challenges. The SEI responds to the specific needs of the energy transition in the EBRD countries of operations, as well as to the call of the G8 at the 2005 Gleneagles Summit for the IFIs to scale-up climate change mitigation investment. The SEI focuses primarily on energy efficiency. Through the SEI the EBRD is:

• aiming to scale up its sustainable energy investments to €1.5 billion between 2006 and 2008, more than double the level of the previous period;
• building policy dialogue to support the scaling up of investments; strengthening its capacity to mainstream energy efficiency objectives throughout the Bank with enhanced specialised support from a dedicated energy efficiency and climate change team;
• working with other multilateral development banks and institutions to enhance the impact of its policy dialogue and share best practice;
• and establishing a broad partnership with donors to mobilise grant funds required to scale up public and private sector financing.

What has been achieved

The SEI is already yielding significant results. From its launch in 2006 to the end of November 2007 the total investment volume by the EBRD alone under the SEI has reached €1.375 billion (US$2 billion) or 92% of the SEI three year target. Total project value reached around €7 billion.

In launching the SEI the EBRD also made important management and organisational changes in its approach to sustainable energy. The EBRD is the only IFI with a dedicated Energy Efficiency and Climate Change Team (employing experienced professionals in banking, engineering, climate policy and carbon finance). Known as E2C2 the Team works across all areas of the Bank’s activities in order to ensure sustainable energy opportunities are identified and exploited in as many EBRD projects as possible. The objective is to fully mainstream this activity within the organisation.

The EBRD and the EIB have established the Multilateral Carbon Credit Fund, a public-private fund of €165 million targeted to the transition economies.

More about the Multilateral Carbon Credit Fund.

Donor support

A key component of the SEI has been to strengthen dialogue with donors and to make the case for raising additional funds to support the SEI investment programme. Donor funding is essential in helping to overcome the barriers to sustainable energy investments – which range from lack of awareness and technical knowledge amongst management of private companies to weakness in regulatory frameworks aiming to create a level playing field for sustainable energy projects.

Since 2006 the total donor funding raised for the SEI is €38.3 million for technical assistance and €58 million for grant investment co-financing. Examples of the uses of donor funds include:

• €30,000 energy audit at a major Polish steel works which identified 7 key energy efficiency projects with total investment of €42 million and IRRs ranging from 9% to 150%;
• €15 million grant from the Bohunice Nuclear Decommissioning Fund to support a €60 million commercial bank credit line in Slovakia dedicated to smaller energy efficiency and renewable energy projects; and
• €50,000 to develop a model for assessing the impact of urban transport projects on carbon footprint of municipal transport
  operations.

The challenge

Compared with western Europe, EBRD countries of operations use up to seven times more energy to produce each unit of GDP and produce disproportionately high levels of greenhouse gases. This stems from a range of factors including the structure of the economy, distorted energy prices, the general lack of energy efficiency regulations and standards, obsolete technologies, and lack of awareness together with limited political or managerial focus on energy savings. Indeed until recently, in the face of other reform priorities and relatively low energy costs, the efficiency of energy use has not been widely considered as integral to the economic transition agenda. Now however the region confronts a triple challenge:

• One of the most important and enduring challenges in the countries of central and eastern Europe and the Commonwealth of Independent States is to address their inefficient use of energy, a legacy of the former command economy that undermines the competitiveness of enterprises and economies, threatens energy security and contributes disproportionately to carbon emissions.
• Improvements in energy efficiency are essential for the countries in transition to improve their competitiveness. Many enterprises in the manufacturing and light and heavy industry sectors have positioned themselves in the market place as low-cost producers. They have been able to do this not least by taking advantage of low energy costs, which more than offset the inefficient use of energy in their production process. However, as energy prices are gradually increasing to market levels, the cost advantage of these firms is being eroded unless they succeed in cutting energy waste.
• Most countries of operations depend on oil and gas imports and coal, hydro and nuclear as their main, often problematic, sources of energy. Inefficient uses of energy further increase import dependence and increase vulnerability to energy price fluctuations. The energy importers of the region can improve energy security by reducing energy waste, diversifying sources of energy, increasing renewable energy and cooperating with neighbours on cross-border energy issues. High world energy prices provides a powerful incentive to cut energy waste, review fuel mix options and improve security of supply.

In the global context, the wasteful use of energy means many of the most attractive options to reduce greenhouse gases (GHG) emissions are found in the EBRD region. After the United States and China, transition economies are among the highest GHG emitters in the world, with 13% of the global total. Economic growth rates in the region have picked up, reaching an average of roughly five per cent. To a large extent this growth is still fuelled by highly-inefficient and heavilypolluting uses of energy leading to excessive emissions of greenhouse gases contributing to climate change. The IEA's International Energy Outlook 2005 projects that the region’s GHG emissions could increase by 40% between 2002 and
2025.

It has traditionally been difficult to promote energy efficiency in the region – energy has not been seen as a valuable resource and management culture is more focused on how to increase production than save energy. However the time is now ripe: energy prices across much of the region are rising, businesses and governments in transition countries want to act. The EBRD has been recognised by its sister international financial institutions (IFIs) as a leader in promoting and financing energy efficiency.

Project highlights

The Victoria Group

€45 million debt financing (2007) to Victoria Oil (Edible Oil) and Sojaprotein (soy processing) in Serbia. €5 million energy efficiency investments identified through energy audit arranged by the EBRD and funded by CEI (Italy) comprising €4.5 million for installation of two biomass boilers to recover soy straw from harvesting and biomass wastes from production processes and €0.5 million for other efficiency projects such as replacement of inefficient electric motors and optimisation of condensate recovery.

Lukoil Environmental Loan

€106.5 million loan (2007) for an environmental facility which includes  a number of sub-projects aimed at reducing environmental impact and improving environmental practices. Sub-projects include components with substantial sustainable energy elements (mainly energy recovery and energy savings) such as: utilisation of associated gas in a number of oil fields; rehabilitation of oil and gas transport systems; and rehabilitation of waste water systems. These components aim to reduce GHG emissions of related oil and gas operations. The EBRD also aims to explore with the client energy efficiency opportunities related to downstream operations (e.g. refineries).

Enercap Regional Renewable Energy Fund

€25 million commitment to private equity fund dedicated to renewable energy and energy efficiency in central and eastern Europe. The Fund achieved first closing at €75 million in November 2007 and is the first large scale panregional renewable energy fund. It has an experienced management team and expects to invest the majority of
its funds in wind energy, for which it has a proprietary pipeline of over 1 GW capacity to be financed during the investment period. The EBRD was a cornerstone investor in the Fund and will appoint a representative on the investment committee.