April 24, 2017
BRUSSELS INSIDER #1 by Sonja van Renssen
Special report: clean energy in Southeast Europe - "Put on a plate, but not eaten"
April 24, 2017
The EU is doing all it can, including spending billions, to expand renewable energy and improve energy efficiency in Southeast Europe. But the response of local policymakers and investors is lukewarm – despite the enormous potential of the region. “Everything was put on a plate, but the proposals were not adopted”, says the EBRD. Sonja van Renssen reports.
“The first region [in Europe] which could be 100% renewable from a cost and potential point of view is Southeast Europe,” said Green MEP Claude Turmes at a conference in Brussels on 29 March. The conference, co-hosted by German think tank Agora Energiewende, explored clean energy opportunities in a region – like Ukraine next door – better known until now for its role in gas politics. But with the cancellation of the South Stream pipeline project at the end of 2014, it is the area’s renewables and energy efficiency potential that is attracting more attention.
“There is great potential for energy efficiency and renewables in Southeast Europe,” said European Commission Vice-President for the Energy Union Maroš Šefčovič, who is Slovak, at the 29 March event. He suggested that the region could in future meet its entire electricity demand from home-grown renewables. And he described the rise and evolution of CESEC, the Central East South East Europe regional cooperation group created in response to the demise of South Stream, as “one of the nicest surprises” of his career. CESEC expanded its remit from gas security of supply to electricity, renewables and energy efficiency last year.
These initiatives and statements are more than wishful thinking. There really is a lot to do. Buildings in Southeast Europe still consume far more energy than the European average (sometimes eight times more than in a frontrunner like Denmark). Meanwhile, the International Renewable Energy Agency (IRENA) calculates that the technical potential for renewable energy in Southeast Europe is 740GW, most of that wind (530GW) and solar (120GW). IRENA includes Ukraine, which has the biggest potential, but Romania is a close second. Romania already hosts Europe’s largest onshore wind farm on the Danube delta.
Yet IRENA also calculates that just 127GW of all that renewables potential is cost-competitive today. Most countries in the region still face a significant risk of missing their renewable energy targets for 2020 and 6GW of new coal capacity is planned for the Balkans by 2030, a group of 16 MEPs warned in a manifesto entitled “South-eastern Europe: more than just a gas corridor, a lighthouse for Europe” in June 2016.
Cost of capital
The big problem for both renewables and energy efficiency projects in Southeast Europe is getting financed. “Clearly the financing challenge is the key one,” said Georgi Pirinski, a Bulgarian Socialist MEP at the 29 March event. Turmes agreed: “We need to lower the cost of capital as the number one priority.”
Cost of capital, or the fee that investors ask for putting up cash for projects, has a huge impact on the deployment of renewables because these are highly capital-intensive. The “Diacore” project carried out by a consortium of researchers for the Commission in 2013-16, quantified the extent of the challenge. It mapped out cost of capital for renewables across the EU-28 for the first time – and found that it ranged from 3.5% in Germany to 12% in Greece. Southeast Europe (this analysis did not include non-EU countries in the region) scored worse than any other part of the continent. IRENA calculates that the cost-competitive renewable potential in this region could be more than doubled if low-cost capital were available.
Mobilising capital is also a problem for energy efficiency. Billions of Euros of European regional development funds flow to energy infrastructure in Southeast Europe and most of that into energy efficient renovations of public and residential buildings. The numbers have only gone up over time. But the big question for Oliver Rapf, Executive Director at the Buildings Performance Institute (BPIE) in Brussels is: “Do the funds trigger [private sector] investments in buildings efficiency?”
He believes not. Or at least not enough. Julian Popov, a Fellow at the European Climate Foundation (and Bulgarian by nationality) said that his country has probably spent €1 billion on energy efficiency but it “can’t trigger €1 of private investment”. In their June 2016 manifesto, MEPs from the region call for a regional “hub” for technical assistance for energy efficiency projects as well as special purpose financing vehicles to combine grants with loans.
Energy efficiency in Southeast Europe is hindered by missing policy frameworks as well as the traditional barriers of regulated prices (which engender longer payback times), a fragmented market, poor information, public authorities’ lack of technical capacity and financial options, split incentives, risk-averse banks and so on.
A representative from the European Bank for Reconstruction and Development (EBRD), Associate Director Nigel Jollands, emphasised on 29 March that the region has had significant help, both with policies and financing, but “progress is just too slow”.
Taking the EU’s two primary energy efficiency laws, the 2012 energy efficiency directive (EED) and the 2010 energy performance of buildings directive (EPBD) – both already under review again as part of the Commission’s 30 November Clean Energy package) – 14 out of 34 deliverables due over three years in six countries in Southeast Europe have still not been adopted. “Everything was put on a plate but the proposals were not adopted,” Jollands said. He gave several explanations:
- politicians remain unconvinced by the policies in question (one delegate suggested they would remain so while a big chunk of government revenues depends on a sales tax on energy, coupled with the push from international financial institutions like the IMF for a minimum budgetary deficit)
- a lack of technical capacity to act on the advice given (in Albania only 2-3 government representatives work on energy efficiency)
- a weakening desire to align with the EU (due to Brexit and talk of delays to accession)
- active lobbying to undermine energy efficiency (this is especially true in Ukraine, Jollands said, where the EPBD should have been presented to the Rada (Parliament) several times already but keeps slipping off the agenda
“The real reason for lack of action on energy efficiency is political economy more than economic supply and demand issues,” Jollands concluded. One delegate at the conference suggested that only a broader effort to transform the region (especially the Western Balkans) by taking on corruption and criminal networks would have a real chance of success.
In a way, a broader approach is essential. In the Diacore report, the researchers cite country risk as the single biggest barrier to lower cost of capital in regions like Southeast Europe. Apart from that, market actors say that the main problem is the design of renewable support schemes. The point of renewables policies is to reduce risk and therefore cost of capital. In its proposal for a new EU renewable energy directive for 2030, the Commission makes this an explicit objective.
Ian Temperton, a consultant to Agora, presented a very concrete way to achieve this objective on 29 March: an EU Renewable Energy Cost Reduction Facility (RES-CRF). This would be “a contractual arrangement between member states, an EU institution and investors in renewables projects”. The point is to convince investors that member states will honour their renewables payments by backing them up with an EU guarantee. Temperton explained: “You transfer responsibility for enforcing future tariffs from project investors to an EU institution,” adding “who might have a chance of enforcing them.”
The RES-CRF would provide a hard guarantee for tariff risks (e.g. retroactive changes, non-payment or backdoor taxes) and encourage best practice in non-tariff risks such as grid access and permitting. The scheme would be entirely voluntary. Agora calculates that it could save taxpayers over €34 billion out to 2030, nearly a third (€10 billion) of that in Southeast Europe. Hard guarantees, not promises of “no retroactive changes” in speeches or even in legislation is what will convince investors, Temperton said.
The RES-CRF model is unlikely to work for energy efficiency, Temperton said, simply because governments do not promise payments for energy efficiency the way they do for renewable energy generation. Over €1.1 trillion in energy efficiency investments will be needed however, for the EU to meet its 40% greenhouse gas emission reduction target for 2030. Three-quarters of that should go to buildings (which account for 40% of EU final energy consumption).
The European Investment Bank (EIB) has tripled its energy efficiency lending rate since 2012 and for Southeast Europe there is financial and policy support from both the EU and EBRD – yet still investors stay away. What is still missing, are sufficient standardisation, benchmarking and information exchange to bring down risk.
The Commission and UNEP created the Energy Efficiency Financial Institutions Group (EEFIG) in 2013 to make energy efficiency attractive to the financial sector. It delivered a landmark report in 2015 and has created a database, DEEP, that lists thousands of efficiency projects in buildings and industry with payback times and investment per energy saved. In June, EEFIG will issue a value and risk appraisal guide to standardise underwriting for energy efficiency investments.
EEFIG also spawned the Investor Confidence Project (ICP), which aims to standardise how energy efficiency projects are developed, documented and monitored. Along the same lines, experts like Rapf want the EU to introduce “individual building renovation passports” that set out, per building, what can be done, at what cost and how. This kind of bottom-up standardisation could facilitate aggregation and thereby trigger private sector interest.
These issues are being discussed at a series of “Sustainable Energy Investment Forums” organised by the Commission’s Executive Agency for SMEs (EASME) across Europe over the next three years (see the most recent one, in Brussels, on 30 March). The Fora seek to fill a gap not only in terms of content, but in terms of where the energy efficiency debate takes place between the EU and local levels: they want to engage the national level.
Member state engagement on Brussels-led energy efficiency and renewables initiatives remains lukewarm at best. Don’t expect them to rally behind a 35% renewable energy target for 2030, as recently proposed by lead MEP for the file José Blanco Lopéz. The Commission proposed 27%, drawing on guidance from European heads of state and government. Definitely don’t expect them to like Blanco Lopéz’s idea of a return to national binding targets to underpin it.
Meanwhile, Malta, who holds the EU presidency until June, has proposed to keep a 30% energy efficiency target for 2030 indicative (not binding, as the Commission suggested). In addition, it wants to lower the 1.5% annual energy savings target required under the EU’s current EED to 1.4% after 2020. It also wants to scrap the automatic renewal of that savings obligation after 2030.
Clearly there is plenty of room for the Sustainable Energy Investment Forums to make a difference. If member states are convinced that private investors are on board, they may change their tune. Problem is, private investors want to see clear political direction, secure policy frameworks, and public finance guarantees to do their bit. With unrivalled potential for renewables and efficiency, Southeast Europe has an opportunity to show others how it’s done. But, as Temperton said: “You have to want to do it.”