Carbon Finance in Practice Public Heating Biomass Systems in Moldovan Rural Communities Project Anatol Gobjila, World Bank February 28, 2007, Tirana, Albania

Institutional Set-Up for Carbon Finance in Moldova Ministry of Environment and National Resources – Designated National Authority for Climate Change; National Climate Change Committee – a public climate change forum; Carbon Finance Unit - a public carbon finance project implementation agency.

Project Specific Country Background High levels of poverty in rural areas; Deteriorating infrastructure and limited public spending for rehabilitation; Large dependency on imported fossil fuels; Vast use of inefficient fossil-based heating systems in public buildings in rural areas; Proven potential for energy efficient and clean energy technology using renewable resources (biomass from agricultural waste) for heating of public buildings (schools, hospitals and other public service buildings) in rural communities.

The Research behind the Project A 2002 World Bank sector study indicated that: Unprocessed agricultural waste, primarily straw, is the best suited biomass resource for thermal energy production in Moldova; Small scale systems ( KWth) are suited for initial introduction in Moldovan rural communities; Primary barriers for switching to renewable energy systems (RES) are (i) confidence in renewable energy systems; and (ii) limited financial resources available at rural community level.

Addressing RES Adoption Barriers The Confidence Barrier is addressed through the GEF MSP Renewable Energy from Agricultural Waste Project (supply and installation of pilot biomass heating systems); The Financing Barrier is addressed through: - the Social Investment Fund (SIF) II Project (capital cost for a new heating system and energy efficiency improvements); - the Public Heating Biomass Systems in Moldovan Rural Communities Project (incremental capital cost for RES through carbon credits and monetized efficiency gains)

Project Objectives Generate an added value to the SIF II Project, under implementation in Moldova, through gained GHG Emission Reduction (ERs) benefits; Direct GHG ERs benefits towards SIF II project participants, thus creating incentives for further implementation of GHG mitigation measures, such as use of clean energy technologies (biomass).

Project Description Category of the project activity: I. C "Thermal energy for the user" II.E "Energy efficiency and fuel switching measures for buildings"; III.B "Switching fossil fuels“; Buyer of GHG ERs - the Community Development Carbon Fund (CDCF), administered by the World Bank; The Project represents a bundle of CDM small-scale project activities (currently 61, potentially up to some 240) and refers to the installation of new heating systems for a series of public buildings in rural areas; The main feature of the Project (although not limited to) is the use of biomass (straw) as fuel for heat production; Project activities (PA) are technologically independent, stand-alone, and spread out all over the country; Project duration: Estimated reductions: 356,000 tones of CO2, over 11 years.

Project Benefits Economic Benefits: the Project leads to a decrease in the cost of a heat unit production and additional income streams for beneficiaries in the form of carbon payments and monetized efficiency gains. Social Benefits: - the Project allows to decrease payment burden for consumed energy resources and increase local employment; - besides it, the project improves the living and activity conditions within the considered public buildings (the room heating temperature normalization; increased duration of the heating period; availability of affordable hot water) Environmental Benefits: Conventional coal-burning boiler houses create massive pollution, hence a switch to biomass or gas, as envisaged by the Project will substantially reduce in-door and out-door pollution. Technological Benefits: The Project implies the adoption and application of more advanced technologies for heat production based on the use of biomass.

Description of the Project Set-upProject Set-up Project beneficiaries come from the pool of SIF clients (rehabilitation of heating systems in rural public buildings); Individual beneficiaries conclude Subsidiary Agreements with the Carbon Finance Unit (CFU) which stipulate the mechanisms for the delivery of GHG ERs and payments; Carbon Finance Unit The CFU bundles the agreements into a consolidated Emissions Reduction Purchase Agreement (ERPA); The CFU negotiates and signs an ERPA on behalf of the individual beneficiaries with a ERs buyer (in the case of the Project – the CDCF) Upon delivery of GHG ERs, the CDCF provides payment to the CFU, which in its turn makes a series of payments to the individual beneficiaries in accordance with the stipulations of Subsidiary Agreements.

Description of the Project Set-up

What is the Carbon Finance Unit The CFU is and independent legal entity created under the Ministry of Environment and Natural Resources with the support of a Japanese PHRD Grant; The CFU’s primary role is facilitation of CDM projects in Moldova, including scouting for and preparation of Project Idea Notes for interested potential beneficiaries; The CFU has the authority to enter into principal-agent relationships with a variety of interested buyers and sellers of GHG ERs; and The CFU has the authority to represent its principles financially and otherwise, as the case may be. The CFU has direct project implementation responsibilities towards its principles.

The Financing Structure The Social Investment Fund: - capital cost for the rehabilitation of heating systems and energy efficiency improvements; Beneficiary Community contribution - Incremental capital cost (if applicable) for a RES financed through cash, bank loans, various leasing arrangements; Payments from the CDCF - Off-setting over time (10 years) the higher cost of a biomass boiler; Efficiency gains - Monetized savings are used to off-set the higher cost of a biomass boiler, as well as for other social needs in the rural communities.

Reporting and Monitoring Activities Subsidiary Agreements provide for specific reporting and monitoring commitments between the CFU and beneficiaries; Monitoring plans are enforced in each community providing, among other, information on collection and archiving of specific data (heating system, its capacity, days in operation, use of resources, etc). The CFU verifies that the monitoring methodology and plan are implemented correctly and check the information in accordance with the provisions of the Subsidiary Agreements Data from the monitoring reports serves as the basis for determining carbon payments due at the end of the period.

Implementation Risks and Lessons Learned The Project is complex and synergetic, requiring perfect synchronization and buy-in among various stakeholders (ex. the GEF MSP, the SIF, the CFU and the beneficiaries); Overcoming confidence barriers towards clean energy technologies is a difficult process in a fossil-dominated fuel market, even when alternative resources are readily available; Overcoming financing barriers requires a solid public financial effort, and/or a fairly sophisticated financial market to allow communities to renew heating systems; Carbon finance represents a good financial incentive for poor communities to adopt and apply clean energy technologies