World Bank Approach to Financing Heating Infrastructure – Europe and Central Asia (ECA) Region Presentation at Conference on Heating Sector Institutional Reform in the FSU Baku, October 21, 2005

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

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

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

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

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

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

Ongoing WB EE Projects in CEE u Lithuania (GEF) u Poland (IBRD and GEF) u Croatia (IBRD and GEF) u Romania (GEF) u Bulgaria (GEF) u ESMAP project in Poland

Lithuania Heat Demand Management Project u Project launch: 2003 u $6.5 million: VE $2.5m and VCM $4.0m u VE Component (Dalkia): Heat regulation improvements. 75% support from Effective Energy Consumption Fund. Total planned investment: $34m. u VCM Component: Building envelope improvement through revolving fund with international fund manager

Poland EE Projects (1) u Krakow EE Project (launched 2002) u Recipient: MPEC, Krakow u $15 million IBRD loan, of which $7.5 million for ESCO activities u Operation of utility based ESCO (POE) as subsidiary of MPEC u Targets public sector buildings in Malapolskie Region

Poland EE Projects (2) u Poland EE Project (launched spring 2005) u Recipient: BGK bank and POE, Krakow u $11 million GEF Grant: $7 million for guarantee facility, $2 million for POE ESCO investments, $2 million for TA u Work through participating banks, guarantee coverage: 50-70% u Active pipeline development and support to energy audits.

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

Bulgaria Energy Efficiency Fund u Launched Summer 2005 u GEF grant of $10 million: $4.5m partial credit guarantee, $4.0m debt financing, $1.5m TA u Co-financed by $1.8 million from GoB and $5.75 million from bilateral donors (tbc). u Fund will be flexible employing debt finance or guarantees as needed u International Fund Manager

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