PROPOSAL FOR REVIEW
PROJECT TITLE: CAPACITY BUILDING TO REDUCE KEY BARRIERS TO ENERGY EFFICIENCY IN RUSSIAN RESIDENTIAL BUILDINGS AND HEAT SUPPLY
GEF FOCAL AREA: Climate Change
GEF ELIGIBILITY: Convention Ratified 28 December 1994
Eligible under Paragraph 9(b) of GEF Instrument
TOTAL PROJECT COSTS: US $4,280,000
GEF FINANCING: US $2,980,000
GOVERNMENT COUNTERPART FINANCING OF GEF COMPONENT: US $1,300,000
COFINANCING/PARALLEL FINANCING: US $2.4 million (US AID)
US $125,000 (EU TACIS)
US $80,000 (Dutch TAGOS)
ASSOCIATED PROJECTS: US $300 million (World Bank; for 6 cities)
US $120 million (World Bank; for 4 cities)
US $35 million (World Bank; for 4 cities)
GEF IMPLEMENTING AGENCY: UNDP
EXECUTING AGENCY: Ministry of Science and Technology Policy / Russian Association of Energy Efficiency Demonstration Zones
ESTIMATED APPROVAL DATE: January 1996
PROJECT DURATION: 4 years
GEF PREPARATION COSTS: PRIF $400,000 (for regional project preparation)
BACKGROUND
1. Because of the huge existing inefficiencies in energy production and consumption that resulted from the former Soviet economic system, some of the best opportunities for CO2 reduction in Russia come from investments in energy efficiency. Energy intensities and management practices in many sectors are more reflective of those found in developing countries than those in developed countries. Many studies have shown that energy intensities in Russian energy-supply and end-use sectors could be reduced by 25-100% if average technological levels and typical management practices used in the West were present in Russia.
2. While very few energy-efficiency investments have taken place since the demise of the centrally-planned economy in 1992 due to enormous barriers and uncertainties, recent developments and legislative actions have focused more attention on energy efficiency. The federal energy program "Fuel and Energy," approved by the government in 1995, outlines priorities for energy sector development and considers energy efficiency one of Russia's top priorities. In May 1995 President Yeltsin signed a decree on the basic directions of energy policy and restructuring of the fuel and energy industries, in which energy efficiency is prominent. After several years of drafting and legislative consideration, the Russian parliament finally passed a federal law on energy efficiency, which was signed by president Yeltsin in April 1996.
3. While these federal-level actions are encouraging, many observers feel that the majority of real energy efficiency gains in Russia will come from local and regional initiatives and activities (this is true for many other aspects of Russia's economic development as well). Authority to decide many matters of energy policy, tariffs, and energy regulation is increasingly being turned over to the regional and local levels (regional and local energy commissions and administrations). Federal laws establish general guidelines, but require local and regional authorities to develop implementation mechanisms and take actions that will remove barriers to market-oriented activities. City governments are taking matters into their own hands; for example, Moscow has its own energy efficiency program, and new energy-efficiency standards for buildings have been enacted in the absence of any federal standards. And examples of a variety of energy efficiency initiatives can be found in many cities outside of Moscow.
4. District heat (heat supplied from centralized systems) in Russia represented over 34% of total final energy consumption in 1990 in all sectors combined excluding transport. The problems of inefficient heat production, distribution, and consumption in district-heating systems in Russia are by now well-known in the West. Some of the best opportunities for energy-efficiency savings and consequent CO2 reductions come from improvements in heating boilers, district-heat distribution pipelines, heating system controls in buildings, and building insulation. Opportunities to save 25-35% and even up to 50% are technically feasible and economically cost-effective. These opportunities are almost universal across all of Russia's 89 regions; centralized district heating systems supply heat to 80% of Russia's population through highly standardized systems and buildings. The economic importance of greater energy efficiency is also high. City governments in Russia are now spending up to one-third or more of their total annual budgets just on subsidies to residential space heat and hot water (no other forms of energy are now directly subsidized in Russia besides residential space heat and hot water). Gas and heat prices in Russia have risen to Western European levels, and as these full costs are passed on to households (as mandated by a 1994 government decree requiring elimination of subsidies by 1998), residents will be hard-pressed to pay monthly heating bills that will approach one-third to one-half of the average monthly wage.
5. This proposal addresses three key activities that represent some of the greatest opportunities for energy efficiency improvements and energy saving in heat supply and consumption: (1) institutional changes that create incentives (where none now exist) for greater energy efficiency and energy conservation in existing distribution and end-use infrastructure; (2) much greater penetration of autonomous (decentralized to the building-level) sources of heat; and (3) the capacity to analyse the financial and economic aspects and feasibility of capital investment projects for commercial and multi-lateral financing. Other key activities not addressed in this proposal (but which other initiatives are addressing) include: (4) development and implementation of energy-efficient building codes and standards for new construction; (5) reform of housing policies and housing maintenance institutions; and (6) further development of industrial cogeneration and creation of competitive heat-supply markets.
6. Creation of incentives for energy efficiency and energy conservation. Most residential buildings in Russia, except those still owned by enterprises and a very small number of cooperatives, are the responsibility of municipal governments, even though all or most of the apartments themselves may have been privatized. Currently, city administrations pay heat suppliers (district-heating companies) for the full costs of heat delivered to residential buildings (including both space heat and hot water), measured as the heat leaves the heat production source (sometimes with a fixed standard allowance for distribution losses). City administrations then bill households a fixed monthly amount which depends upon apartment size and registered number of household members, not by actual consumption. The difference between payments to heat suppliers and receipts from households is the city's subsidy (still typically 70-90% of full costs). While city administrations have incentives to invest in energy efficiency in buildings (to reduce subsidies), they are severely capital constrained and as subsidies decrease this incentive will weaken. Also in this situation, district heat companies have no incentive to reduce distribution line losses, and households (either individually or collectively through tenant associations) have no incentive themselves to invest in energy efficiency or to take actions to conserve energy. In this situation, consumption-based heat metering and billing is an important first step towards: (a) providing incentives for energy-efficiency investments and energy-saving actions by households and by tenant associations; (b) placing incentives to reduce district-heat distribution line losses with the district heating companies that own and maintain the distribution lines; and (c) allowing financial returns from such investments to flow to those making the investment. The Russian government recognizes consumption-based heat metering and billing as a top priority in the federal energy program "Fuel and Energy" and in the recently passed law on energy efficiency.
7. Autonomous building-level heat sources. Overcentralization of heat supply in Russia, in part due to the prevailing ideologies of the Communist era, has resulted in a lower-efficiency of heat delivery than is technically possible. As noted by Russian district-heating experts, the Soviets considered large centralized district-heating systems (where 100,000 people or more may be connected to one system) to be better a priori, without properly investigating more decentralized alternatives. Both Russian experts and international agencies like the World Bank have recognized that for greater efficiency, autonomous (decentralized) heat sources should play a much greater role in Russia's heat supplies in the longer term. Studies conducted in Eastern Europe have shown that the economically optimal penetration and size of centralized district-heating systems depend upon urban geography and population densities, and suggest that much of the existing infrastructure in Russia does not correspond with economically optimal solutions. This overcentralization has left great opportunities for improved overall system efficiency and economic benefits through more autonomous, decentralized heat supplies. Overall district-heating system efficiency from heat production to final consumption is commonly only 50% because of production losses (up to 35%), distribution losses (up to 30%), and poor control of heat flows throughout the system from production to final consumption (resulting in large temperature imbalances and overheating and underheating of many buildings and apartments). Autonomous heat sources have the potential to produce heat at much greater overall system efficiencies where cost-effective and where gas distribution constraints can be overcome.
8. Project economic and financial analysis and feasibility studies. A third important issue for energy efficiency in Russia is the general deficiency in skills and capacity to identify, evaluate, and propose energy-efficiency investment projects for multilateral or private-sector financing. While Russians possess great scientific and engineering skills, deficiencies are acute in the areas of economic and financial analysis and in the institutional capacity to develop and propose projects in the manner required by multilateral and Western and Russian commercial lenders.
9. Building codes and standards. Building codes and standards represent another key area for energy efficiency improvements in buildings in the longer term. However, building codes and standards are not addressed in this proposal because other international assistance efforts, including those by the U.S. Department of Energy, have recently begun to address this subject. Further, the potential shorter-term CO2 reductions from removal of barriers to energy efficiency and energy conservation in the existing building stock are far greater than those from enhanced standards for new building construction (coupled with historically low rates of new construction).
CONTEXT:
10. Russia ratified the Framework Convention on Climate Change in December 1994. A special Inter-Ministerial Commission was established by a presidential decree in April 1994 to implement Russia's commitments under the Convention. The scientific organization Roshydromet (Russian Federal Service for Hydrometeorology and Environmental Monitoring) is in charge of the climate change program, and during 1995 Russia's national climate plan was under development. Both energy efficiency and reduction of natural gas pipeline leakages are important aspects of this plan. Improved energy metering and control especially is considered one of the more viable means of short-term mitigation of CO2 emissions.
11. The World Bank and the Russian Government are currently undertaking three investment projects in several cities in Russia related to energy efficiency: the Enterprise Housing Divestiture Project (EHDP), the first Gas Distribution Rehabilitation and Energy Efficiency Project ("Gas I"), and the second Gas Distribution Rehabilitation Project ("Gas II"). The city of Vladimir (population 375,000; located 300 km east of Moscow) is included in all three of these projects. The EHDP will finance end-use energy-efficiency investments (including insulation, controls, and heat meters) in residential buildings to make these buildings less costly to operate, in order to facilitate divestiture of residential buildings from enterprises to the city government. Loans from the World Bank to six Russian cities (including Vladimir) under this project are expected to total $300 million, with practically all of the investment going towards energy efficiency improvements. The "Gas I" loan has allocated $60 million for energy efficiency improvements in a group of specific cities (including Vladimir) for projects evaluated through the Russian Energy Savings Fund (RESF). The "Gas II" loan will upgrade gas distribution systems in Vladimir and improve their efficiency. The EHDP loan was approved by the World Bank board in April 1996. The "Gas I" loan was approved in 1995, and project preparation for the "Gas II" loan is continuing, with board approval expected in 1998.
12. Other activities in Vladimir related to energy efficiency are being undertaken by USAID and private European firms. This proposal builds upon the achieved and expected outputs of these activities, and continued coordination between these projects through the city Energy Project Management Unit (see project implementation section) will be important. In 1995, Vladimir was awarded a $2.4 million USAID grant under the Commodity Import Program for energy efficiency improvements and analysis of the district heating systems in one district of Vladimir, including a limited study of the institutional issues involved in district heating systems in Vladimir. In 1992-93, the French firm Sofregas, as part of a self-financed market study, analyzed the heat demand at the Vladimir Tractor Factory (a privately owned enterprise) and also at a residential building near the plant. In 1994, the private German firm Ruhrgas together with another German firm conducted a (confidential) study of the district heating systems in Vladimir, including the technical potential for saving gas in heat production, distribution, and residential and public (commercial) buildings, and also proposed future development options.
13. The city of Vladimir has been designated as an "Energy Efficiency Demonstration Zone" by Russian Ministry of Science and Technology Policy and by the Russian Association of Energy Efficiency Demonstration Zones. The purpose of an Energy Efficiency Demonstration Zone is not to demonstrate technologies per se, but rather to demonstrate, on a local level, the institutional innovations, regulatory and legal changes, information dissemination, and other types of activities that are intended to remove barriers to market-based investments in greater energy efficiency (which can then be replicated elsewhere). In Russia in 1995, there were 18 such zones either existing, planned or being created (Zelenograd, Istra, Vladimir, VNIIGAS, Saratov, Lefortovo, Tver, Nizhny Novgorod, Belebey, Kirovsk, Samara, Mytistchi, Rostov, Kaliningrad, Karelia, Lubertci, and St. Petersburg). The EU TACIS and THERMIE programs, as well as the Dutch TAGOS program are financing activities in some of these demonstration zones, including Vladimir. These demonstration zones are also supported by the Energy Efficiency 2000 program of the United Nations Economic Commission for Europe, which is coordinating activities among similar zones throughout Eastern Europe and the former Soviet Union.
PROJECT OBJECTIVES:
14. The project objectives are to overcome barriers to implementation and realization of energy-efficiency improvements and energy conservation in residential buildings and heat delivery systems. GEF grants will reduce three key barriers to energy efficiency and energy conservation and allow dissemination of this experience to other cities in Russia. These three key barriers are: (1) misplaced or missing incentives for tenants, tenant associations, and district heating companies to improve energy efficiency and reduce energy consumption in residential buildings and district heating distribution pipelines; (2) fundamental uncertainties about the feasibility of and issues (technical, economic, legal, institutional, and political) associated with autonomous sources of heat supply as replacements for overly centralized district heating systems; and (3) lack of capacity to conduct economic and financial analyses and feasibility studies of energy efficiency projects that may be financed by public and private financing institutions.
PROJECT DESCRIPTION
15. There are four distinct components described below:
Component 1: Prototype Residential Heat and Hot Water Metering and Billing System
(a) Description: Create a widely-applicable prototype regulatory and institutional model for consumption-based heat and hot water metering and billing. Develop the required regulatory, institutional, and software capacity in Vladimir and disseminate this model and experience to other cities in Russia. This model will include regulatory requirements, institutional arrangements (including integration with evolving municipal and private building maintenance and operation institutions and condominium formation), billing administration and payment mechanisms, schemes for building-level metering and apportionment of building-level billing across all apartments based upon heat distribution models, and regulations governing apartment-level metering and billing.
(b) Barriers: Energy efficiency investments and conservation actions in residential buildings in Russia today face the following barriers: (a) lack of available capital; (b) lack of technical design, financial evaluation, and procurement services experience and capacity; (c) building-level and apartment-level heat meters do not exist; (d) households have no incentive to improve the thermal efficiency of their buildings or to reduce their space heat and hot water consumption because they do not pay for heat and hot water consumption according to marginal consumption, but rather pay a fixed monthly amount; (e) households, even if owners of their apartments, are not responsible for maintaining the building itself; (f) households are not organized into tenant associations that can collectively make investment decisions about the building; (g) city government subsidies for heat and hot water reduce household incentives; (h) district heat companies have no incentive to invest in improving the energy efficiency of the distribution network because they charge the city administration for heat as it leaves the heat plant not as it enters buildings; and (i) apartment-level metering of heat consumption is difficult and costly because of the physical piping arrangements within buildings.
(c) Rationale: A consumption-based metering and billing system will remove the key incentive-related barriers (barriers (d) and (h) above) to future energy efficiency investments and energy conservation actions by households in residential buildings and by district heating companies for associated district heating networks. Profitable investments are not occurring and energy conservation actions are not taking place because households and district heating companies lack any economic incentives. Removal of these incentive-related barriers is the critical pre-condition for all other actions and for the further reduction of other barriers. Further, removal of other barriers is not essential to allow at least partial energy efficiency investments and energy conservation actions, and the other barriers are simultaneously being addressed through other means. For example, the Enterprise Housing Divestiture Project (EHDP) will remove the lack-of-meters barrier (c) because it will install building-level heat meters in a majority of multi-family residential buildings in Vladimir (most meters will be in place by 1997). Institutional barriers like responsibility for buildings (e) and tenant associations (f) are slowly changing based upon already-enacted government decrees. In fact, housing policy reform experts have noted that the creation of incentives for households to reduce energy consumption should encourage greater degrees of household responsibility and tenant association formation, thus further reducing these barriers. The subsidy-related barrier (g) clearly will be reduced in the future as city government subsidies to households decline (decreasing subsidies are a requirement of the EHDP project). Capital-availability and technical- and implementation-capacity barriers (a) and (b) are still significant, but both will be reduced in parallel with the EHDP investments (see section on Risks for further discussion).
(d) GEF assistance will remove barriers that will make possible further reductions in energy consumption beyond the reductions associated with the EHDP. The EHDP provides capital and technical and procurement assistance directly to city governments for investments that will provide cost-recovery by reducing city government payments to heat suppliers for residential heat consumption. Therefore, the EHDP does not address directly the incentives to reduce distribution line losses, nor household incentives for further actions that households can take (either individually or collectively as tenant associations) to improve energy efficiency beyond the EHDP retrofits and to further reduce consumption through energy conservation actions. (To ensure cost-recovery and minimize risk, the EHDP has focused on measures that do not depend upon household behavior.) While not strictly necessary for achieving cost-recovery under the EHDP, building-level heat meters are being installed by the EHDP for four reasons: (1) meters are often part of integrated substation packages and represent a small fraction of the total costs; (2) meters will allow before-after comparisons of retrofit measures and verification of project performance (most retrofits will occur a year or more after meter installation); (3) meters reduce information barriers to residential building retrofits elsewhere in Russia by establishing baseline residential heat consumption data for the first time in Russia; and (4) meters provide the possibility of addressing the other incentive barriers in the future (as proposed here). But the EHDP project has not attempted to create consumption-based metering and billing because the regulatory and institutional complexities involved would further burden an already complex project, because the returns from such investments are still uncertain due to the institutional and regulatory issues, and because of the dependence on household behavior.
(e) City government incentives to develop a full prototype model for consumption-based metering and billing are weak at present. Even without metering and billing, a city's revenues from consumers are completely under the city's control through heat and hot water tariffs to households that the city itself sets. A full tenant-side metering and billing system is not necessary for a city to pay heat suppliers for aggregate heat delivered to buildings (metering at production or distribution points would be sufficient). Thus cities will not benefit directly or immediately from consumption-based metering and billing systems, neither in tariff collection from households nor in payments to heat suppliers. While city governments may welcome a shift in incentives that will result in reduced heat consumption and ultimately lower city heat subsidy expenditures, the extent of future incentive-based actions and especially the timing of such actions by consumers and district heat companies are uncertain (once incentive-creating metering and billing are in place). Cities have very short time horizons (1-2 years at present), and heat subsidies are supposed to be phased out anyway under a Russian government decree. Further, if the Vladimir administration does develop a metering and billing system with its own resources, the Vladimir administration may not produce the best or most replicable model, nor develop a prototype to the point where other cities can easily copy it. GEF support will ensure that an effective and generally replicable system is developed as a prototype, that development is accelerated beyond what the Vladimir administration would accomplish on its own, and that replication in other medium-size cities (potentially hundreds across Russia and certainly the other five EHDP cities) is promoted through dissemination activities.
Costs: $1,380,000 (GEF contribution $880,000)
Timing: December 1996 to September 1999
Activities
(a) Create a central heat meter reading, accounting, and billing department within the city government. Develop procedures for all functions of the department and train staff on these procedures.
(b) Purchase computer equipment and develop the accounting and billing software necessary to support consumption-based billing. Train staff on using the software.
(c) Purchase database software and create a detailed computer database of building and apartment characteristics (type of building, configuration, apartment size, number of occupants, end-use equipment, etc.). Purchase modeling software and develop models for allocating building-level heat consumption readings among all apartments within a building based upon building and apartment characteristics. Test allocation models and algorithms. Train staff on collecting and entering data and calculating allocations.
(d) Develop and support passage of the regulations necessary to support consumption-based billing and tariff setting. Regulations must apply to all entities involved in heat markets -- consumers, building maintenance companies, and heat producers and distributors. Coordinate these activities with other activities by NGOs in Russia to develop building codes and standards and standard building energy consumption reporting and evaluation tools.
(e) Conduct a public information campaign within Vladimir to educate and inform the public about consumption-based billing.
(f) Conduct social surveys to identify public concerns about consumption-based billing and ways to mitigate these concerns.
(g) Write a handbook based upon the city's experience with implementing consumption-based billing to disseminate this experience to other Russian cities. Create a public relations function within the municipal government to actively disseminate the experience and to answer requests for information by other cities. Coordinate and work with the EHDP Central Project Implementation Unit and Local Implementation Groups in the other five EHDP cities to disseminate the experience from Vladimir and facilitate replication. Coordinate and work with Russian NGOs to disseminate the information to other regions of Russia and to conduct public information campaigns outside of Vladimir.
(h) Design and develop an optimal system of capacity and investment planning, management, and flow control of centralized heat supply and distribution networks based upon the data available from building-level meter readings. Create and train a group of technical experts to analyze the data and its implications for planning and management.
16. Component 2: Autonomous Heat Production in Residential and Public Buildings
(a) Description: Study and demonstrate the technical, economic and institutional feasibility of investments in autonomous (decentralized) heat supplies in residential and public buildings, and study the implications of these investments (and similar investments in commercial enterprises) for future development and investment in gas distribution networks.
(b) Barriers. There still exist large information gaps and the uncertainties associated with autonomous (decentralized) heat supplies as an alternative to centralized district-heating systems. Few feasibility studies or demonstration projects exist from which to learn. Uncertainties include technical performance; installation and operation costs; the necessary upgrading and restructuring of gas distribution systems; and the impacts on district heating systems and their costs and profits. Institutional issues include ownership (the advantages and constraints are not clear for potential owners such as gas suppliers, households and tenant associations, building maintenance companies, district heating companies, or municipal administrations); responsibility for operation and maintenance; metering and billing; and limitations on placement locations in buildings dictated by existing construction standards and structural factors. This last issue, placement location, is quite important for Russia on a national level, because construction standards have prohibited gas-fired equipment in building basements (one rationale was the danger of explosions) and the Ministry of Construction is reluctant to change these standards even though basement placement is common in many other countries. Other alternatives, like placement on detached buildings or on rooftop locations, may be more costly and problematic than basement locations.
(c) Rationale: GEF support will reduce information and uncertainty barriers that are not being addressed sufficiently by other domestic or foreign programs. Federal-level support that addresses these barriers has been minimal, because heat supply issues are considered the domain of municipalities. But local officials lack resources to properly address this issue. The World Bank ESMAP study has begun to examine long-term district-heating system development issues. The ESMAP study considers the question of autonomous heating sources versus centralized district heating systems to be a critical one, although the limited scope of the first phases of this study will just begin to address the issues (in Russia a three-week study in one city is being conducted in 1996). Private activities have been limited, with the exception of Ruhrgas of Germany, which has developed one demonstration autonomous boiler installation in Stavropol. The activities in this component will build upon the initial ESMAP results and other related studies and activities in Russia and help to bridge the information gap, reduce uncertainties, and result in more effective investment decisions. In particular, the question of how penetration of decentralized heating supplies will affect gas distribution systems has not been addressed in existing activities, but has implications for effective investment decisions made under the second Gas Distribution Rehabilitation project and other gas distribution projects. Thus overcoming information and experience barriers, and understanding the future penetration and character of autonomous heat supplies will have ripple effects in district heating and gas distribution systems that over time will result in significantly greater energy efficiency of these systems. Until these information and experience barriers are overcome, private-sector actors will be reluctant to invest in autonomous heat supplies because of the uncertain returns and viability. For example, Ruhrgas has stated that it is not investigating these issues with a profit motive, but rather for public relations value in its relationship with Gazprom.
Costs: $1,620,000 (GEF contribution $1,070,000)
Timing: December 1996 to December 2000
Activities
(a) Conduct a technical evaluation of different types of decentralized heat supply technologies and configurations in residential buildings (including both heat-only and cogeneration technologies). Evaluate different placement locations within buildings, taking into account existing and projected Russian construction norms. Develop a set of cost estimates and cost estimation methodologies for the different technical options.
(b) Analyze the types of buildings and geographical characteristics (location, existing heat supply, etc.) where it is technically, economically, and legally viable to install decentralized heat supplies, relative to existing supply options (i.e., centralized district heating supply).
(c) Study the institutional and market issues that may prevent or hinder installation of decentralized heat supplies, including ownership, operation and maintenance responsibility, metering and billing, standards and certification, and legal requirements. Involve heat suppliers, gas distribution companies, potential investors (including Gazprom), and other relevant stakeholders in the design and implementation of all phases of the studies. Recommend policy mechanisms to overcome or mitigate these barriers.
(d) Install demonstration autonomous heating boilers in two or three selected buildings (in different placement locations within the buildings) to demonstrate the following: (i) the costs of installation; (ii) issues of control, metering, operation, and maintenance; and (iii) necessary safety and security innovations for basement, roof, and detached installations (each with very different requirements). Analyze the costs of installation and operation in comparison with the costs of centralized heat production, and the emissions in both cases.
(e) Study the issues and strategies for future district heating system development under different scenarios of decentralized heat supply penetration. Compare the energy consumption and environmental impacts between district heat and decentralized heat supply under different scenarios.
(f) Disseminate the experience with the demonstration installation and the results of the studies through publications, seminars, and public information and media.
17. Component 3: Energy Efficiency Project Analysis and Feasibility Studies Capacity
(a) Description: Build the skills and capacity within the Vladimir administration and local enterprises (municipal and private) to conduct project financial and economic analyses and to undertake project feasibility studies suitable for public and private financing sources.
(b) Barriers: The lack of capacity to analyze the financial and economic aspects of energy efficiency projects and to prepare feasibility studies suitable for consideration by Western and domestic financing sources is an important barrier to energy efficiency investments in Russia. In general, the capacity to undertake technical analysis and to understand technical measures for energy efficient is excellent, but the parallel skills in understanding how to evaluate the financial and economic aspects of projects are poor or non-existent -- such as rates of return, sensitivity analysis, lending terms, cash flow, and cost estimation. These skills were not needed in the centrally planned economic system, but now represent a critical barrier to project finance. Many so-called "project proposals" being developed today throughout Russia are merely technical specifications of what must be done without any economic or financial analysis, nor even cost data (while cost estimation is a well-developed art in the West, it is poorly developed in Russia's new market environment). These deficiencies are also coupled with a lack of good understanding of what constitutes a project feasibility study and the requirements and appraisal methods of lenders.
(c) Rationale: There are a variety of potential financing sources that are now available to Vladimir and other cities for energy efficiency investments -- including special energy efficiency departments of commercial banks, public regional and national energy efficiency funds, and a $60 million capital fund provided by the World Bank in the Gas Distribution Rehabilitation and Energy Efficiency project. The experience to-date with capital fund disbursements in Russia suggests that development of the absorptive capacity for such capital funds is a critical element of capacity building for energy efficiency. But the need for basic training and education is so severe and widespread that domestic and foreign financing institutions face a difficult task even if they have resources to devote beyond assistance for actual project preparation. With GEF support these skills and capacities can be comprehensively developed in one locality, and then disseminated and replicated elsewhere.
Costs: $480,000 (GEF contribution $430,000)
Timing: December 1996 to December 1997
Activities
(a) Train a selected group of 20-30 people from the Vladimir city administration, the city Energy Project Management Unit, the municipal district heating and gas distribution companies, major local enterprises and firms, and universities in economic, and financial analysis of energy efficiency projects and in conducting project feasibility studies. Build a permanent capacity within these institutions for assistance with project analysis and feasibility studies.
(b) Disseminate the training and project analysis and feasibility experience in Vladimir, to at least five other cities in Russia. Conduct seminars in Vladimir and Moscow and make publicly available example analyses and project feasibility studies. Create a manual in Russian to accompany the seminars and to support other more informal channels of dissemination to other Russian cities.
18. Component 4: Institutional Support and Monitoring Programme
(a) Description: Develop and maintain the capacity to implement and monitor all of the activities under this proposal. This capacity includes managers, domestic and foreign experts, and staff to guide and manage the project over the course of four years, and training and office equipment to support the staff.
(b) Rationale: The Vladimir city administration has decided to create a non-governmental management structure, the Energy Project Management Unit (EPMU) to manage all energy-related projects that the city is undertaking (see Institutional Framework and Project Implementation section below). Each project in the city will be required to support its own implementation group within this structure.
Costs: $400,000 (GEF contribution $300,000)
Timing: December 1996 to December 2000
Activities
Create a GEF project group within the city Energy Project Management Unit (EPMU) and train and support this group as appropriate to manage the implementation of Components 1-3 above, and to coordinate as appropriate with other groups within the EPMU and with other organizations outside the EPMU.
INSTITUTIONAL FRAMEWORK AND PROJECT IMPLEMENTATION
19. The Russian Association of Energy Efficiency Demonstration Zones (RosDem) in Moscow will execute the project in consultation and coordination with the City of Vladimir, the Ministry of Science and Technology Policy, the Ministry of Fuel and Energy, and the Moscow-based project implementation unit for the Enterprise Housing Divestiture Project. The exact requirements of consultation and coordination with the EHDP will be specified in a memorandum of understanding between the World Bank and the UNDP. RosDem is a non-governmental organization established in 1994 to support energy efficiency activities throughout Russia. RosDem's primary activities include project preparation, coordination and communication between and among Russian and Western organizations, and dissemination of energy efficiency experience between cities throughout Russia. RosDem is in a good position to achieve the dissemination and replication benefits possible from this project. RosDem receives government support from the Ministry of Fuel and Energy and the Ministry of Science, from the association's approximately 30 members (including private Russian firms and city governments of energy efficiency demonstration zones), from some commercial contracts, and from the revenues of an endowment established by its founders (which include Gazprom and RAO "EES Rossii," the national electric utility). In 1994 the association had income of approximately $50,000 equivalent. RosDem's execution of the project is endorsed by the City of Vladimir and the other Russian partners.
20. At the local level in Vladimir, project implementation will be managed by a dedicated GEF project group within Vladimir's Energy Project Management Unit (EPMU). The EPMU will be a non-governmental foundation governed by a board of directors, and will be established as a legal entity in 1996 by the city to manage and coordinate all energy projects underway in the city. The GEF group within the EPMU will be financed and supported under Component 4 described above. Management and administration of the World Bank projects and other energy projects in Vladimir will also occur within the EPMU, so that close coordination of the World Bank and other projects with the proposed GEF project will occur readily.
21. The memorandum of understanding between the UNDP and the World Bank will likely specify the following conditions: (a) the EHDP Central Project Implementation Unit (CPIU) must review and approve the project document; (b) physical interventions in EHDP buildings in Vladimir under component #2 must be approved in advance by the EHDP CPIU, along with a construction coordination plan; (c) someone from the Vladimir EHDP Local Implementation Group should be consistently informed (i.e., on a monthly basis) about metering and billing plans and regulatory development; and (d) in the Vladimir administration's annual report to the EHDP CPIU, the city should include a status report on the GEF metering and billing activities, and the CPIU will include an assessment of these activities in its annual assessment to the World Bank.
CONSULTATIVE AND PAARTICIPATORY PROCESSES
22. The proposed project has developed through extensive consultation among several Russian collaborators, including the Ministry of Science and Technology Policy, the Ministry of Fuel and Energy, the Ministry of Environment, the Ministry of Economy, the non-governmental Russian Association of Energy Efficiency Demonstration Zones, and the City of Vladimir. The UN Economic Commission for Europe Energy Efficiency 2000 Project has facilitated the consultative process and engaged experts to help these agencies develop the present proposal. Initial discussions among these agencies began in mid-1995 and continued into early 1996. Representatives of the Enterprise Housing Divestiture Project (EHDP) also reviewed the project concept and discussions took place to ensure that proper coordination will occur between the activities in this proposal and the activities of the EHDP. The Ministry of Science and Technology Policy and the City of Vladimir took the lead in proposal preparation and the Russian Association of Energy Efficiency Demonstration Zones played a coordinating role between Russian partners and the UN ECE.
LESSONS LEARNED AND TECHNICAL REVIEWS
23. Much of the experience with energy efficiency investments and related capacity building in Russia is relatively new and scattered among different sectors and geographical areas. Existing experience is sparse; many feasibility studies have been conducted on paper in recent years, while fewer investment case studies exist. Even rarer are actual institutional experiments and models upon which city administrations and private investors can base future activities and policies. The accumulated experience points more to the barriers involved than to successes. This project has developed with keen awareness of the barriers that the existing experience conveys, and the project addresses those issues that are most important in leveraging profitable energy efficiency investments and energy conservation actions.
24. An earlier proposal on energy efficiency demonstration zones, including those in Russia, was reviewed in 1993 and was rated a high priority by both the STAP and the GEF Implementation Committee during 1993. This project has developed from that earlier proposal and has incorporated the comments from that review phase. Comments by the evaluators have also been incorporated into a reconceptualization of the function and meaning of energy efficiency demonstration zones by the UN ECE. After this earlier review phase, a $400,000 regional PRIF was granted to UNDP for the development of energy efficiency demonstration zones and project proposals in four countries including Russia. The current project has been prepared under those funds.
25. Both an earlier technical review of the present proposal (February 5, 1996) and a recent technical review (July 27, 1996) recommended that the GEF fund the proposal. The earlier review expressed a few concerns that have been subsequently addressed in proposal revisions: (1) the reasons why neither the city administration nor the World Bank are financing implementation of a pilot metering and billing system in the baseline are now more clearly described in the rationale for Component #1; (2) the GEF is not and was not being asked to fund the installation of meters under Component #1; (3) analyses performed under the activities in Component #2 will use market heat prices and will also compare pollutant emissions; and (4) the reason why building codes and standards are not addressed is described in the Background section. The more recent review suggested several small improvements that also have been incorporated into the present proposal: (1) participation of staff from the other five EHDP cities is included; (2) as stated in component #1, heat meters in Vladimir will be in place by 1997, and execution of component #1 should not take place before installation is assured; (3) involvement of public and private heat producers in component #2 activities is included; (4) further details have been added to components #3 and #4; (5) coordination with the World Bank is elaborated in the institutional arrangements section; (6) the incremental cost matrix shows overall CO2 savings potentials; and (7) concerns from the earlier review are now listed in this paragraph in addition to having been addressed in the proposal.
MONITORING AND EVALUATION
26. The project will be subject to tripartite review (joint review by representatives of the Government, executing agency and UNDP) at least once every 12 months. The first such meeting will be held within 12 months of the start of full implementation. The executing agency will prepare and submit to each tripartite review meeting a Project Performance Evaluation Report (PPER). Additional PPERs may be requested, if necessary, during the project.
27. In addition to normal UNDP project monitoring and evaluation activities, non-governmental organizations with a history of evaluating assistance programs in the energy efficiency field in Eastern Europe, the Baltics, and Russia will be enlisted to monitor the project and provide evaluations and feedback at critical junctures. This monitoring and evaluation activity will not only provide additional feedback to the project itself, but will be used in disseminating project experience (along with recommendations for avoiding mistakes that may be evident within this experience).
28. The International Academy of Energy, a Moscow-based independent scientific research organization comprised of distinguished Russian energy experts, will also perform a yearly review of the project and issue a report with any recommendations for changes to project structure or activities. The report will be available to all associated parties, and it will be the responsibility of the executing agency and the Vladimir Energy Project Management Unit to ensure that project activities continue to reflect the recommendations and evaluation of this and other groups.
SUSTAINABILITY OF PROJECT BENEFITS
29. Sustainability of project benefits will occur if the barriers to energy efficiency and energy conservation are effectively removed on a permanent basis, and if the expected market-based cost-effective energy efficiency and energy conservation actions continue to occur once barriers are removed. In this proposal, sustainability of all three components is relatively straightforward. Once the regulatory and institutional basis for a consumption-based metering and billing system is in place, circumstances that would reverse the adoption of such a system are not foreseen, unless some unanticipated and severe social issues arise. Participation of the other five EHDP cities in component #1 activities will help ensure that sustainable adoption in these other five cities is facilitated. Information and experience related to autonomous heat sources cannot disappear once generated and also represents a permanent reduction of information and uncertainty barriers. Project preparation capacity developed under component #3 will be sustainable if the individuals and organizations involved in the capacity-building and training remain in Vladimir and continue to help prepare energy efficiency projects; thus the selection of these individuals and organizations will be important to sustainability. Beyond the barrier-removal activities in this proposal, the main barrier that will remain is the availability of credit to make investments. However, the removal of institutional, information, and uncertainty barriers through this proposal will greatly help make further credit available from both public and private sources, including from the EHDP. Furthermore, the cost pressures that households will increasingly face as subsidies for residential space heat and hot water are removed will result in no-cost energy conservation actions once incentives are in place, without any need for additional capital. Many other measures like improved insulation and manual control valves can be done at relatively low-cost. Lastly, rehabilitation of gas distribution systems will more appropriately take into account the needs and potential of autonomous heat sources, which will result in greater technical viability of energy efficiency improvements with autonomous heating boilers in the future.
30. Because of the wide applicability of the activities proposed here, and the importance of the key problems that they address throughout Russia, dissemination and replication of results obtained in Vladimir to other regions of Russia is critical. Logical candidates for early dissemination would be the five other cities receiving World Bank financing under the Enterprise Housing Divestiture Project and the other cities eligible to receive energy efficiency loans under the first Gas Distribution Rehabilitation and Energy Efficiency loan by the World Bank. The primary mechanism for dissemination and replication will be the Russian Association of Energy Efficiency Demonstration Zones (see Institutional Framework and Project Implementation section above), a non-governmental organization based in Moscow whose charter specifically mandates these types of dissemination and replication activities. The Enterprise Housing Divestiture Project's (EHDP's) Central Project Implementation Unit (CPIU) in Moscow has responsibilities that include dissemination of EHDP results throughout Russia. Dissemination will also occur through the Ministry of Science and Technology Policy, and through direct contacts between the Vladimir Energy Project Management Unit and other cities (as described in detail under each project component above). Additional dissemination will occur from the activities of the non-governmental organizations enlisted to provide project monitoring and evaluation (see the Project Monitoring and Evaluation section above).
RATIONALE FOR GEF SUPPORT
31. The proposed barrier-removal activities are consistent with GEF Operational Program #5 ("Removal of Barriers to Energy Conservation and Energy Efficiency") adopted in February 1996. Once barriers are removed, future activities can be expected by a potentially wide range of agents -- households, residential building tenant associations, district heating companies, city governments, energy service companies, housing maintenance companies, and gas suppliers. These future activities will include residential-building energy-efficiency and energy-conservation measures, district-heating distribution system rehabilitation, use of autonomous heating supplies to supplement or replace district heating where economically cost-effective, and energy efficiency projects financed under the first Gas Distribution Rehabilitation and Energy Efficiency project and through other financing sources. Because of the standardized nature and characteristics of district heating systems and residential buildings throughout Russia, capacity building activities that address barriers in one local context are relevant across most of Russia, and thus there is great CO2 reduction potential from dissemination and replication of successful models and experiences. Because of related World Bank investments in Vladimir, GEF funding for capacity building activities will be especially effective in Vladimir because the capacities developed will support and complement the investments and capital availability. World Bank investments in heat meters under the EHDP make a prototype metering and billing system viable more rapidly than would otherwise be the case (component #1); World Bank investments in the gas distribution systems make the issue of autonomous heating boilers even more practical and urgent (component #2); and World Bank capital availability for energy efficiency projects in Vladimir under the Gas Distribution Rehabilitation and Energy Efficiency loan make project preparation capacity even more beneficial (component #3).
INCREMENTAL COSTS
32. Project baselines, alternative interventions, and domestic and global benefits are described in Annexes 3 and 4. In all cases the baselines include successful realization of the associated World Bank investments. Additional energy efficiency and energy conservation activities beyond the baselines associated with all three components of this proposal display negative incremental costs (are economically cost-effective investments) and will result in global environmental benefits in the form of CO2 reduction. Energy savings will be achieved as households improve the energy efficiency of their buildings and take other conservation measures, as district heating companies reduce distribution line losses, as autonomous heating boilers are installed, and as additional energy efficiency projects are prepared and financed. But these energy savings can only be achieved after the activities in this proposal first remove the barriers that prevent their realization. Costs for the barrier-removal activities themselves are positive and represent GEF incremental costs. Activities in this proposal for information and experience dissemination to the five other Russian cities participating in the Enterprise Housing Divestiture Project and to other cities throughout Russia will achieve additional domestic and global benefits elsewhere in Russia, although these benefits are not quantifiable.
ISSUES, ACTIONS, AND RISKS
33. One clear risk in terms of achieving global benefits is that energy efficiency investments and energy conservation actions may not take place once barriers are removed. As mentioned under the Sustainability section, the most likely barrier remaining will be lack of credit, but credit availability should improve once uncertainty and incentive barriers are removed. Further, the economic motivations of households and the potential economic benefits are expected to become so strong that many low-cost and no-cost activities will occur regardless of credit availability once incentives are in place. The parallel experience from the building retrofits under the Enterprise Housing Divestiture Project (EHDP) will further demonstrate the value of energy efficiency and energy conservation measures, and should promote further credit availability and willingness of households to borrow. The EHDP will also make available some credits to district-heating companies. In the case of autonomous heat sources, the potential for cost-effective energy efficiency may prove less than preliminary evidence indicates, thus reducing anticipated global benefits. Loan effectiveness of all three World Bank loans (EHDP, Gas I, and Gas II) is another risk. Loan effectiveness of the EHDP and Gas I is expected in 1996, while loan effectiveness of Gas II is not expected until 1998. Other risks are associated with the implementation performance of the activities in this proposal. For example, the EPMU may not manage the project properly or with sufficient skill; institutional or social obstacles to consumption-based billing may delay such a transition; and projects prepared for financing under the Gas Distribution Rehabilitation and Energy Efficiency loan may not be prepared with sufficient skill and may not be approved. Many of these risks are typical of barrier-removal activities in general, and can be reduced through proper project planning, management, and careful interim monitoring and evaluation.
PROJECT FINANCING AND BUDGET
34. The indicative total cost of the project is $4,280,000 (see Annexes 1 and 2). The contributions by the Russian government to this project under the federal program "Fuel and Energy" and by the administration of Vladimir total $1,300,000. Parallel financing by the World Bank and other on-going activities related to the project are detailed below.
35. The following table shows parallel financing associated with the three World Bank loans to Russia related to energy efficiency under which the administration of Vladimir will be a loan recipient. The estimated portion of the Enterprise Housing Divestiture loan available to Vladimir is dependent upon loan negotiations and credit worthiness. This share, based upon city size and target infrastructure relative to other cities, could be approximately $50 million. The $60 million available under the energy efficiency component of the first Gas Distribution Rehabilitation and Energy Efficiency Project will be available for project proposals from ten cities including Vladimir.
Project Name Amount Approval
Gas Distribution Rehabilitation and Energy Efficiency Project (10 cities) $ 60 million 1995
Enterprise Housing Divestiture Project (6 cities) $300 million 1996
Gas Distribution Rehabilitation Project (4 cities) $120 million 1998
36. Other on-going assistance activities associated with the project are grants from US AID under its Commodity Import Program ($2.4 million), the EU TACIS program ($125,000), and the Dutch TAGOS program ($80,000). All three of these grants are directed at district heating system studies and energy efficiency improvements in district heating in Vladimir. The Dutch TAGOS assistance directly supports the investigation of autonomous sources of heat (Component 2). The US AID and EU TACIS assistance is more broadly applicable to many district heating issues, while also supporting the project activities in Components 2 and 3. The project will integrate and build upon the results and information from these three associated activities.
ANNEX 1
INDICATIVE BUDGET -- CONTRIBUTIONS BY GEF AND RUSSIA, AND ON-GOING ACTIVITIES
COMPONENT GEF Russia GEF Parallel On-Going
Project Finance by Activities
Total World Bank
US AID EU TACIS Dutch TAGOS
1. Residential Heat and 880 500 1380 $300
Hot Water Metering and million
Billing System (6 cities)
2. Autonomous Heat 1070 550 1620 $120 $2.4 $125,000 $80,000
Production in Residential million million
and Public Buildings (4 cities)
3. Energy Efficiency 430 50 480 $35
Project Analysis and million
Feasibility Study (4 cities)
Capacity
4. Institutional Support 300 100 400
and Monitoring Programme
Project Evaluation 20 20
Project Support Costs 280 100 380
TOTALS 2980 1300 4,280
Figures are in US $1000 unless noted
Figures represent budgetary totals for the entire 4 year project duration
ANNEX II
INDICATIVE GEF BUDGET, INCLUDING INCREMENTAL COST SUMMARY
COMPONENT Staff Training Equipment Subcontrac TOTAL Transaction Likely Replication/
Costs Costs Costs t Costs COSTS Barriers Incremental Dissemination
Addressed Costs
1. Prototype 480 350 100 450 1380 lack of handbook;
Residential Heat and incentives by negative information
Hot Water Metering residents and after campaigns;
and Billing System district barriers are training
heating removed
companies
2. Autonomous Heat 420 240 650 310 1 620 uncertainties negative publications;
Production in about after seminars;
Residential and feasibility and barriers are information
Public Buildings issues removed campaigns
3. Energy Efficiency 140 120 80 140 480 lack of negative documentation
Project Analysis and capacity to after ; training
Feasibility Study identify, barriers are
Capacity evaluate and removed
propose
projects
4. Institutional 250 50 40 80 420 training
Support, Programme
Monitoring, and
Evaluation
Project Support 380
Costs
TOTAL PROJECT BUDGET 4280
TOTAL GEF REQUEST 2980
Figures are in US $1000
Figures represent budgetary totals for the entire 4 year project duration
ANNEX III
INCREMENTAL COSTS
Component #1
1. Baseline: The Enterprise Housing Divestiture Project (EHDP) occurs as planned, building retrofits are completed, and building-level heat meters are installed in a large fraction of all multi-family residential buildings in Vladimir. The city administration pays for heat delivered to residential buildings according to measured heat plant output (because of retrofits, total demand is 30% less than in the pre-EHDP case) or according to meters at heat distribution points. Households continue to pay for heat according to fixed monthly charges, which increase because of decreasing city subsidies. Households are hard-pressed to pay increasing costs for heat, but cannot translate reduced consumption into reduced payments for heat. Building-level meters are not used for billing purposes in the shorter-term, and the city administration slowly develops a consumption-based metering and billing system, but is hard-pressed to resolve the institutional and regulatory issues without outside assistance and lacks sufficient resources to allocate to the task. The city administration does not benefit from international experience with such systems, does not develop the most general and appropriate model for metering and billing applicable to other Russian cities, and does not devote any resources to making its experiences with developing such a system known to other Russian cities.
2. Alternative intervention: With GEF assistance, the city administration develops a full prototype metering and billing system, including the regulatory changes, institutional arrangements, institutional capacities, and software required. This prototype model is developed for maximum replicability and benefit to other medium-size Russian cities (population 100,000 to 500,000). Because of the new incentives brought about by consumption-based metering and billing, and further because of declining city subsidies for heat and because of the consumer elasticity of heat demand, households and tenant associations take additional steps to improve the energy efficiency of their buildings and to conserve heat. These steps can include installing additional insulation at the apartment and building levels, installing additional radiator valves and individual space-heat and hot-water meters, reducing consumption of hot water (through more careful use when washing dishes, taking showers, etc.), and manually regulating the heat supply into the building (for example, during warmer climatic periods, periods of district-heat oversupply, and at night). The experience is easily and widely available to other buildings in Vladimir that have not undergone retrofits in the baseline, and also to other cities, both through active dissemination and demonstration, and through Vladimir city resources devoted to answering requests for information and visits by officials from other cities. The city administration pays district heating companies for heat delivered to buildings, and the district heating companies begin to invest in decreasing distribution line losses because of the new incentives.
3. Domestic and Global Benefits: All of the additional steps brought about by the new incentives are economically cost-effective, and payback periods for additional investments are less than 10 years. Tenants in EHDP buildings can save an additional 5-20% of heat demand. Tenants in non-EHDP buildings in Vladimir and other cities can save up to 30% or more of heat demand at payback periods of less than 5 years. District heating companies can reduce distribution line losses by 5-15%. Assuming an additional 15% reduction (partly in the buildings and partly in the distribution lines) associated only with the buildings under the EHDP project, then another 100,000 tons CO2 annually would be saved in Vladimir. Replication in the five other EHDP cities could result in savings of another 400,000 tons CO2 annually. Further savings from replication of the metering and billing model to hundreds of other medium-size cities across Russia would greatly multiply these benefits. It is important to stress that even with the new incentives under this component, the extent to which additional energy-efficiency investments and energy-saving actions will be carried out and the timing of these activities are highly uncertain, even though they are economically profitable. This uncertainty is partly due to availability of financing. Yet the cost pressures on households in the future, especially as city subsidies are eliminated, will be a strong force driving these actions, especially no-cost conservation actions. Without the proposed alternative intervention, it is fairly clear that households and district heating companies will simply do nothing to save energy.
Component #2
4. Baseline: Current efforts to develop decentralized sources of heat and overcome barriers to more widespread adoption continue at a minimal pace in Vladimir with city resources and from experiences in other Russian cities. Investments in autonomous heat sources proceed slowly because of the technical, institutional, and informational uncertainties. Decisions made under the second Gas Distribution Rehabilitation project and other gas distribution projects occur within the current understanding and estimation of future penetration and technical and institutional configurations. Necessary changes to gas distribution systems to accommodate decentralized sources of heat are slowly incorporated into existing and future rehabilitation projects.
5. Alternative intervention: A concerted effort as elaborated in this proposal to demonstrate costs, technical issues, institutional issues, and district heating system impacts results in much greater awareness of the issues, costs, and benefits of autonomous heat sources. Dissemination activities result in further demonstrations and the creation of a stronger commercial market. Manufacturers expend their own resources and other municipal governments tackle the regulatory and institutional issues sooner than they would otherwise. Decisions about gas distribution system rehabilitation more rapidly incorporate this expanding body of information and experience, and will begin to be influenced by the expanding commercial markets. Gas distribution system rehabilitation will evolve more rapidly to accommodate the most economically viable configurations and penetration of autonomous heat sources.
6. Domestic and global benefits: Preliminary experience in Russia and engineering calculations suggest that potential energy savings for one building using an autonomous heat source are 30-40%, and suggest that economic rates of return sufficient to justify investments are possible in many situations. It is of course very difficult to estimate the exact impacts of improved information and experience related to autonomous heating sources on future investment decisions for autonomous heat sources and on future decisions about gas distribution system rehabilitation, and especially how much this information and experience will accelerate adoption and investment in decentralized options where they prove cost effective. For a typical multi-family apartment building, this energy savings translates into roughly 400 tons CO2/year.
Component #3
7. Baseline: The Vladimir administration and district heat company prepare project proposals for district heat and gas efficiency investment projects using the existing experience and capabilities of their officials and engineers. Some of these proposals will be eligible for capital under the first Gas Distribution and Rehabilitation Project.
8. Alternative intervention: The Vladimir administration has greater capacity to analyze and prepare investment projects, as outlined in Component #3, and shares this capacity and disseminates its experience with other cities.
9. Domestic and global benefits: Because of the increased project preparation capacity, a larger quantity of more cost-effective energy efficiency projects will be financed that offer both attractive economic rates of return and global CO2 reduction benefits. It is difficult to quantify the domestic and global benefits from these projects, and the multiplier effect of developing and replicating a fundamental and essential capacity. As one example, the Gas Distribution Rehabilitation and Energy Efficiency loan estimates 1,200,000 tons CO2/year reduction associated with $60 million of total energy efficiency investments.
ANNEX IV
INCREMENTAL COST MATRIX
Costs Domestic Benefits Global Benefits
COMPONENT #1
Baseline: EHDP retrofits occur. $50 million building Energy use and city 200,000 tons CO2/year
City pays heat suppliers for heat retrofit costs financed payments to heat avoided emissions for
according to production or by World Bank (600 suppliers reduced by Vladimir (600
substation level metering. buildings @$60,000 to 30% (payback time of 5 buildings)
Building-level meters installed but $100,000 per building) years). Gas savings of
not used for billing until the city 110,000 tcm/year and
slowly develops a metering and some coal savings (600
billing system on its own. No buildings).
incentives for households to save
heat.
Alternative intervention: new $50 million (World Additional energy 300,000 tons CO2/year
incentives for households and Bank), plus $1,380,000 savings of 5-30% in avoided emissions for
district heating companies to to remove barriers, plus buildings and district Vladimir (based on
invest in energy efficiency and additional investments heating systems from assumption of
conserve energy, through metering with new incentives no-cost conservation reasonably achievable
and billing systems, result in measures and from additional 15% energy
additional energy savings in the investments with savings for 600
longer-term more rapidly and more payback times of 1-10 buildings and
widespread than in the baseline. years. associated heat
distribution system)
Incremental costs $1,380,000 to remove positive economic 100,000 tons CO2/year
barriers returns from avoided emissions for
investments and Vladimir, plus
conservation measures replication benefits
COMPONENT #2
Baseline: current efforts to $65,000/building/year heat provided to 1100 tons
develop decentralized sources of current heating cost buildings from district CO2/building/year
heat and overcome barriers to more heating system emissions
widespread adoption continue at
minimal level. Buildings remain
district heated.
Alternative intervention: a $1,620,000 to remove 30-40% energy savings 700 tons
concerted effort to demonstrate barriers. Level of per building with CO2/building/year
costs, technical issues, investment in autonomous payback time 5-10 years emissions
institutional issues, and district boilers (preliminary (gas savings 220
heating system impacts results in estimates of tcm/building/year).
much greater awareness of the $150,000/building) Gas distribution system
issues, costs, and benefits of difficult to quantify. rehabilitation benefits
autonomous heat sources. Markets difficult to quantify.
develop and investments in
autonomous boilers occur. Gas
distribution system rehabilitation
proceeds with better understanding
of future gas infrastructure needs.
Incremental costs $1,620,000 to remove positive economic 400 tons
barriers returns from CO2/year/building
investments avoided emissions
(120,000 tons CO2/year
avoided emissions for
Vladimir assuming
conversion of 10% of
district-heated
buildings) plus
replication benefits
and other
non-quantifiable CO2
reduction benefits
COMPONENT #3
Baseline: Vladimir administration 0 some projects developed some CO2 reductions
and district heat company prepare and funded
project proposals using the
existing experience and
capabilities of their officials and
engineers
Alternative intervention: Vladimir $480,000 to remove accelerated and more CO2 reductions from
administration has greater capacity barriers cost-effective energy energy efficiency
to analyze and prepare investment efficiency investments projects not financed
projects and obtains more financing and gas and coal in the baseline or
for more cost-effective projects savings slowly developed in the
baseline
Incremental costs $480,000 to remove positive economic incremental CO2
barriers returns from reductions through
investments accelerated and more
cost-effective
investments, multiplied
through replication
ANNEX V
STAP ROSTER TECHNICAL REVIEW
CAPACITY BUILDING TO REDUCE KEY BARRIERS TO ENERGY EFFICIENCY IN RUSSIAN RESIDENTIAL BUILDINGS AND HEAT SUPPLY
RELEVANCE TO GEF
1. The project is clearly relevant to the global warming area of GEF. It will improve the efficiency of energy supply and use in Russia by removing barriers to the efficient allocation and use of heat in residential buildings. It will enhance the technical capacity of the Vladimir municipal energy agencies to monitor, bill and collect money from metered building occupants/owners, and it will analyze and provide information to support the city's transition from a provider of centralized heat to a more economic mix of centralized and autonomous sources of heat. Implementation of the project will reduce transactions cost and carbon dioxide emissions due to reduced fossil fuel and electricity consumption in the heat supply and use sector.
OBJECTIVES OF THE PROJECT
2. The project objectives are well stated and the specific objectives are clear. The project's basic objective is to improve the efficiency of energy use in Vladimir, Russia. This will be achieved through improving the capacity of the Vladimir municipal government for energy efficiency improvements. These objectives are worth pursuing, since Russia's central planners had neglected improving energy efficiency throughout the energy sector. The potential for negative cost improvements is large. The proposal documents the many barriers to these improvements, some of which would be overcome through activities implemented as part of this project.
APPROPRIATENESS OF THE PROJECT APPROACH
3. The project approach is appropriate. It correctly identifies the lack of metering of heat supply in households as the key barrier, among the many barriers to energy efficiency in this sector. The first component of the proposal aims at enhancing the capacity of the municipal government in monitoring and collecting household bills in an efficient manner. The second component is focused on a study to determine the appropriate mix of centralized and autonomous delivery of heat supply to households. With this knowledge, the municipal government can provide appropriate incentives to private and public companies to supply heat in a cost-effective manner. The third component will remove a commonly encountered barrier, the lack of ability to prepare adequate proposals, which prevents developers from being able to access energy efficiency funds.
ACTIVITIES
4. The activities noted in the proposal are appropriate for the implementation of the proposed project. Since the proposal will remove barriers, it is important that its findings be widely disseminated. Dissemination will be helped if staff from energy agencies in the five other cities also participate in the design and implementation of this project, so that they are party to the project from its inception.
5. The first component is worth pursuing provided the meters are in place prior to its implementation. The proposer needs to clarify the situation with meters.
6. The second component of the proposal should be strengthened by involving public and private heat providers in the design and implementation of the study from its inception. Investment and replication will follow more smoothly to the extent their concerns are addressed by the study. The second component should also produce a manual which could be used by other cities in conducting their own assessment of the choices available to them for supplying heat to households.
7. The third component is worth pursuing, but the target audience needs to be identified more clearly. Institutions such as the World Bank often have funds to develop projects, but those in Russia may not.
8. The fourth component needs more detailed statement of what the requested funds will be used for. Are these for salaries only, or do they include training, workshops and the like?
COUNTRIES
9. The proposal is for Russia so no other countries are involved. Successful demonstration of the concept in Russia would be useful to help spread the innovative approaches to most Former Soviet Union and Eastern European countries.
OMISSIONS IN BACKGROUND DISCUSSIONS
10. The background section is well written. No additional information is needed.
INSTITUTIONAL ARRANGEMENTS
11. The proposal makes note of many institutions which will either provide baseline funding or will play a role in project implementation. The proposer should clarify the extent to which GEF activities would be formally coordinated with the World Bank's, and other funders', projects.
FUNDING
12. The funding requested for the project seems appropriate.
INNOVATIVE FEATURES
13. The project approach incorporates several innovative features. It will provide funds for components to remove barriers that are clearly evident and whose removal will reduce transactions and administrative costs of energy efficiency improvement.
INCREMENTAL COSTS
14. The incremental costs of the first component of the project should be viewed in context of the World Bank activities, which this project will support. The incremental cost of the package of activities is presumably negative, provided the barriers to the project are removed. This component is designed to remove one of those barriers.
15. The second component is a study to determine the cost-effective mix of options to supply heat, lacking which, investors are unwilling to come forth with investment for innovative heat supply options. The per building C02 saving of displacing central heat with autonomous heat supply is estimated at 400 tons/year. The study should reveal significant opportunities to tap the overall C02 saving potential in buildings at negative cost. The proposal could state the range of savings that the study will reveal for Vladimir.
16. The third component will spur the proposal development and investment process. As with the above two components, it will reduce the transaction cost of project development and investment and cause C02 savings to occur earlier than they would otherwise. The cost reduction and acceleration of savings would reduce the unit costs of C02 savings.
OTHER COMMENTS
17. In paragraph 24, the proposer mentions concerns that were raised in an earlier review and which were addressed in this proposal. It would help to have a list of these concerns in order to judge the extent to which these have been addressed in this revised proposal.