energy efficiency fund: concept and creation plan

This publication has been produced with the assistance of the European Union. The contents of this publication are the sole responsibility of Ministry of Regional Development, Construction, Housing and Communal Services of Ukraine and can in no way be taken to reflect the views of the European Union.

Energy Efficiency Fund:

Concept and Creation Plan

Ministry of Regional Development, Construction,

Housing and Communal Services of Ukraine

May 31, 2016

Energy Efficiency Fund: Concept and Creation Plan


Table of Contents 1. Introduction .............................................................................................................................. 3

1.1. Current situation ............................................................................................................... 3

2. Functions and Goals of the Fund .............................................................................................. 4

2.1. Fund functions................................................................................................................... 4

2.2. Fund goals ......................................................................................................................... 4

3. Fund concept ............................................................................................................................ 5

3.1. Overview of the Fund concept .......................................................................................... 5

3.2. Governance, organizational model and financing ............................................................. 6

3.3. Implementation of the organizational model ................................................................... 9

3.4. Efficiency projects, Fund products and their delivery mechanisms ................................ 12

3.5. Transfer of subsidies to investments (S2I) ...................................................................... 14

4. Energy Efficiency Fund as seen by customers ........................................................................ 14

4.1. Customer journey ............................................................................................................ 14

4.2. Online platform and steps required by the customer ..................................................... 15

4.3. Customer’s potential cash flow ....................................................................................... 15

4.4. Ways to approach vulnerable customers (subsidy recipients) ........................................ 16

4.5. Communication campaign .............................................................................................. 16

5. Fund financial model .............................................................................................................. 17

5.1. Government financing needed........................................................................................ 17

5.2. Results of the Fund’s operations ..................................................................................... 17

6. Next steps ............................................................................................................................... 19

7. Annex ...................................................................................................................................... 20



1. Introduction

1.1. Current situation

Ukraine has substantial potential to improve energy efficiency. Realization of this potential would allow a significant decrease in consumption and energy resource imports. This is one of two possible ways to achieve energy independency in this country. Besides that, creation of the Energy Efficiency Fund is one of the conditions of fulfilment of EU directive 2012/27/EU, that is a Ukrainian obligation according to the association agreement between Ukraine and EU.

Ministry of Regional Development, Construction, Housing and Communal Services of Ukraine (MinRegion) on 22nd of February has published report “Concept of the Energy Efficiency Fund”, which has provided a detailed overview of the current state of residential heating and proposed strategic vision regarding solving problem of excessive heat consumption in the sector. Key element of this strategy was creation of the National Energy Efficiency Fund, that should significantly speed up implementation of energy efficiency measures in residential sector, and therefore reduce consumption of energy resources.

This document is continuation of the first report and represents results of the work done in the previous months:

Inter-ministerial group was created with representatives of Ministries, other Governmental

authorities and experts

Concept of the Fund was publicly presented and discussed several times on different events,

including on the specialized forum “Demand and Supply in the Heating Sector: Removing barriers,

Enabling Transparency and Implementing Energy Efficiency”, that took place on 31st of March with

participation of members of Cabinet of Ministers of Ukraine, members of the Parliament, foreign

experts and experts

Specialized seminar took place with support of TAEIX program, that is financed by the European

Commission

Experience of functioning of similar mechanisms in Central European countries was thoroughly

studied with participation of experts from Poland, Czech Republic and Lithuania, that had been

responsible for implementing energy efficiency programs in their countries

Several options of organizational structure and functional model of the Fund were developed and

analyzed.

In the course of the work, organizational and functional models of the EE Fund were identified and further detailed. They are described in this document together with a proposed action plan for the EE Fund creation and the legal setup necessary for it to function effectively. Aprt from that, In the course of detailization of the Fund’s concept, the following parties were consulted:

Ministry of Social Policy

Ministry of Finance

State Agency if Energy Efficiency

Experts of World Bank of Ukraine

International Finance Corporation (IFC)

Civil society (RPR)

Berlin Economics



2. Functions and Goals of the Fund

2.1. Fund functions

The Energy Efficiency Fund is expected to fulfil the following functions:

Financial. Currently, most households do not have viable financial instruments for energy efficiency

investments. Given current interest rates on consumer loans (25-30%), households cannot repay

investments from heating bill savings. Moreover, an existing governmental support program

(Warm credits) only provides compensation for the body of credit for materials and equipment

only. With high interest rates and the added cost of construction work, that financial support does

not provide a necessary instrument to boost household investments in energy efficiency. With this

in mind, the Fund’s financial products were designed to provide instruments to repay investments

into energy efficiency from heating bill savings;

Incentivizing. Second, most households, especially ones living in multistory buildings, do not have

incentives to invest in energy efficiency measures. One of the main reasons is that such an

investment will not decrease the energy bill, as most multistory houses currently have neither heat

metres nor instruments to regulate heat supply. Therefore, the Fund should first focus its activities

on measures that would provide instruments to measure heat consumption and regulate heat

supply, thus reducing energy bills, such as heat metres and Individual heating stations for

multistory buildings. And this is expected to trigger further EE actions by residents.

Expert. Third, most households and even construction companies do not have sufficient knowledge

or capabilities to develop and execute energy efficiency projects. Hence, the Fund should provide

expertise and advice in the form of typical projects (solutions) for the house, technical

recommendations for developing a project and provide trainings to energy auditors and. In

addition it should help building capacities and expertise at construction companies, and build

market for energy auditors.

Educational. Finally, there is lack of understanding by a large part of the population about the

concept of energy efficiency, benefits of energy efficiency measures, reasons behind rate increases

and no awareness of instruments to invest in energy efficiency (EE). Therefore, the Fund should

educate Ukrainian households on those matters via a designated communication campaign. This

campaign would work best in combination with products and technical recommendations of the

Fund.

2.2. Fund goals

Taking the current situation into account, the following goals of fund creation are foreseen:

Enabling massive and fast savings of gas and therefore, subsidies and budget funds

Creation of financial instruments for households to invest in energy efficiency and therefore

decrease their heating bills

Attraction of large scale external financing and expertise in the country

Enabling conditions for the formation of an energy efficiency market

Fulfillment of Articles 7 and 20 of EU Directive 2012/27

Creation of a new efficient, transparent and corruption-free institution as a tool of governmental

policy

Provision of expertise and advice regarding energy efficiency to households, construction

companies and other players regarding energy efficiency measures



3. Fund concept

3.1. Overview of the Fund concept

The Fund concept can be divided into four blocks, which are shown in Figure 1.

Figure 1. Blocks of the Energy Efficiency Fund concept

Source: Working group analysis

Block 1 – Governance, organizational model and financing. This block describes how the Fund is financed by

government and donors, the status of the National Account (governmental funds) and Multi-Donor

Account (donors and IFIs funds) and what coordination mechanisms are in place between these accounts.

Other important aspects of this part of the concept is Fund governance.

Block 2 - Execution organizational model. This block shows the Fund’s organizational model on a more

operational level – functions of Technical Office departments, operating costs and high-level organizational

structure.

Block 3 - Energy efficiency projects, Fund products and their delivery mechanisms. This block shows what

energy efficiency measures will be supported, what financial products will be used by the Fund. and

provides an overview of the Fund’s operational scheme (delivery mechanism). Specifically, how energy

efficiency projects are developed, submitted and approved, how and when financing is provided and who

is responsible at each step of the process.

Block 4 – Transfer of subsidies to investments. This block shows how household utility subsidies can be

transferred to energy efficiency investments. It describes how subsidies can be saved and redirected to

energy efficiency and what instruments can be used to incentivize subsidy recipients to do so.



3.2. Governance, organizational model and financing

Principles of its governance and organizational model :

1. Management competence and professionalism. Given the complexity of Fund goals, as well as

financing volumes it should be able to process, Fund should be managed by reputable professionals.

2. Agility in decision making. In the course of the Fund’s operations, many changes should be made,

such as: revision of energy efficiency measures, redesign of financial products and removing

bottlenecks in the operating process. Those changes can only be implemented efficiently if a fast and

agile decision-making process is in place, as well as on-the-spot incentives to drive those changes.

3. Limited political influence. The Fund should be as independent as possible from political influence. It

should fulfil its own key performance indicators (KPIs), regardless of the political situation in Ukraine.

4. Transparency of governance and processes. One of the important building blocks of the Fund’s

success is the development of trust between the institution and population. This is only possible by

enabling full transparency of the Fund. Moreover, transparency is one of the important preconditions

for attracting external financing (donors contributions and IFI loans) to the Fund.

5. Corruption-prevention model with checks and balances in place. Corruption is one of the biggest

sources of inefficiency in Ukrainian state institutions, therefore the governance model should foresee

corruption-prevention mechanisms.

6. Effective coordination mechanism between major stakeholders is in place. As previously stated, the

scale of financing needed in the field would hardly be possible without attracting external financing

in the form of grants and loans. Most international organizations and donors that may provide

financing would like to participate in the Fund’s decision-making process. Therefore, creation of an

effective coordination mechanism between government and external counterparts is one of the

preconditions of a successful governance model.

7. Sustainability of the model. The Energy Efficiency Fund should be a long-term project. Thus, the

governance model should have certain flexibility and could be easily reapplied to different projects.

Description of the governance and organizational model can be divided into three parts:

1. Mechanism of financial flows

2. Governance and organizational structure

3. Legal setup of the Fund

Mechanism of financial flows. General scheme of financial flows is shown in Figure 2.



Figure 2. Financial Flow scheme

1 An IFI will manage donors contributions. Financial flows of donor funds may be adjusted depending on donor and Government agreement with specific IFI.


On the government side, money is transferred to the Fund via annual budget allocations. These allocations

should be foreseen in the budget law. They should be directly linked to a decrease in subsidies and/or

decrease in gas, heating bills etc. The sustainability of financing of the Fund from the State Budget should

be ensured by introducing necessary changes to the Budget Code with set annual allocation size and

sources. Budget funds are allocated to the Treasury account of the Ministry of Regional Development that

in turn makes capital contributions to the newly created State Legal Entity.

From the donor’s side, grants are deposited to an International Financial Institution (IFI), which will act as a

manager of donor funds. IFI then would transfer these funds to the Fund (State Legal Entity) or directly to

the project account in commercial bank. These funds are allocated based on an aligned investment plan

and its implementation progress (e.g. after completion of certain projects and/or fulfilment of certain KPIs).

Money are allocated to the Fund’s accounts and later disbursed to individual projects in the form of grants

and at a later stage possibly as liquidity to banks (to provide low interest loans to households). In any case,

financing is provided only upon review and approval of the respective project by the Fund.

Governance and organizational structure. The general governance structure is shown in Figure 3.



Figure 3. Governance structure

1 Specific IFI should manage donors contributions. IFI role and the scope of its participation in management and supervision of the State Legal Entity (Fund) will depend on donor and Government agreement with the specific IFI. Greater involvement of the IFI would provide more reassurances on the transparency and trustworthiness of the corporate governance of the Fund.


Three main bodies govern the EE Fund:

1. Strategic Coordination Committee that consists of all major stakeholders (government, donor and

IFI representatives) and meets 1-2 times per year. This committee aligns on strategic issues, i.e.

programs, products, reforms needed, board members, etc.

2. Management Board that consists of independent directors (50%+ members), government

representatives (e.g. Ministry of Regional Development), optionally donor and IFI representatives.

The efficient board should be composed of 5-10 people and its members should combine

capabilities and expertise needed to run the institution, such as market expertise (Ukrainian

construction market and residential sector), functional expertise (finance, engineering), industry

expertise (banking, construction, heating), etc. The Management Board sets Fund strategy and

operational rules of the Fun, recruits and appoints an executive team, measures and evaluates their

performance, as well as advocates on behalf of the Fund (promotes external relations, raises funds

and coordinates with key stakeholders). Board Committees also fulfil tasks that cannot be delegated

to the executive team, due to potential conflicts of interest.

3. Executive team of professional managers hired by the board that runs Fund operations in line with

the strategic direction and KPIs set by the board.

Legal setup of the Fund

Creation of the Fund requires several legislative changes:



1. Law of Ukraine on the Energy Efficiency Fund as the financial institution that will regulate the Fund's

status and its key areas of operation. (its legal organizational form will be the same as the State

Mortgage Institution)

2. International agreement between IFI/donors and Ukraine

3. Amendments to the Budget Code of Ukraine

4. Amendments to laws on financial services, management of state-owned property, city-planning, tax

laws, etc.

A separate law on the Energy Efficiency Fund would:

Define legal status of the state legal entity, based on the Fund’s required functions (no appropriate

legal form exists in current legislation)

Provide legal grounds for the financial participation of donors and their participation in the

management board

Streamline processes for energy efficiency projects and enable fast alignment and execution

Analysis of best practices shows that similar funds are regulated by a separate Law in most countries. Examples of Central European countries are shown in Table 1 in Annex.

Another important aspect is that the Energy Efficient Fund requires the creation of a new legal entity. (with Ministry of Regional Development as its likely founder). A separate legal entity would:

Allocate funds to households (no need to follow Treasury procedures each time)

Provide flexibility in the decision-making process

Enable independence from the political landscape

Create a transparent and efficient coordination mechanism between major stakeholders

Hire professional managers

3.3. Implementation of the organizational model

Three bodies within the Fund should be responsible for operational functions. They are shown in Figure 4.

Figure 4. Fund functions


Board Committees fulfil tasks that cannot be delegated to the executive team, due to potential conflicts of interest. Specifically:

Nomination – search and preselection of executives, board members

Remuneration (salaries/HR) – development of salary plans for management, executives and board

members

Compliance – development of audit procedures and selection of audit companies



Board Committees do not make decisions, rather they provide recommendations to the board,

Coordination Committee or key stakeholders. They consist of independent board directors and contracted

professionals for specific tasks (i.e. auditors, technical experts, consultants, etc.).

Technical Office consists of two main functions – technical and financial.

Technical functions fulfils the following tasks:

Preparation and approval of standard energy efficiency solutions and typical projects, including

calculation of potential savings, costs

Training for construction companies and energy auditors

Regional technical support for construction companies and households

Approval (from technical side) of submitted applications

Technical audit of construction work

Development and execution of communication campaign

Running the Fund call centre

Financial functions fulfils the following tasks include:

Development of financial products and implementation mechanisms in collaboration with banks

Managing the Fund’s cash flow

Investing free cash

Project approval (from the financial side)

Technical office in first years is estimated to have 30-40 people in the head office and 15-20 people in

offices (in case of any). Total cost the operations of technical office would be in the range of 0,5-1,5 million

Euro per year. At the moment donors are considering to cover these costs in first years.

An important aspect of the organizational structure is the project approval procedure. It should be done via

a transparent two-stage approval process (technical – financial) that is shown in Figure 5 below.



Figure 5. Project approval scheme

1 Optional. Depends on IFI 2 Clearance, only if major changes to initial request were made 3 Customer (Household, Homeowner’s Association, manager of the house) can assign request function to bank or

construction company 4 Project account at the commercial bank


As stated above, one of the key principles of the Fund model is corruption prevention. Therefore, possible

corruption points were analyzed in the model of the Fund. Recommended corruption prevention

mechanisms are:

Table 1. Possible corruption points and ways to mitigate them

Possible point of corruption Prevention tools

"Political bias" of the Fund's management

Independent board members are selected based on transparent

competition and approved by the Strategic Coordination Committee

Executive directors are selected based on transparent competition and

approved by board members and the Strategic Coordination

Committee

Fund’s management are professionals with relevant expertise,

operating under transparent KPI approved by the board

Selection of construction companies by customer

Transparent selection procedure via the online platform with free

access for all interested parties



Project approval

Approval based on transparent standards

Maximum possible automation of the process

Approval in two stages: technical function – financial function

Internal audit of the technical office

Technical verification of sample of projects by external experts

initiated by management board, Government, donors, IFI

Construction works

Sample on the spot checks during work phase by the Technical Office

Sample on the spot checks after completion of works (e.g. within 5

years of completion) by technical office based on risk assessment

Energy certificates (before and after works) and independent energy

audits (before works)

Operations of technical office

External annual financial audit of the Fund is done in line with best

international practices (e.g. IFRS)

Internal audit of procedures and operations of technical office

3.4. Efficiency projects, Fund products and their delivery mechanisms

All types of energy efficiency were analyzed and grouped into four packages. The first packages (1 and 2) are relatively easy to execute and can be described as “low-hanging fruit” in terms of cost, speed of execution and potential savings. Later packages (3 and 4) are more complicated and costly, but can provide larger savings. These packages were prioritized, based on logical sequence, ease/speed of execution and ROI. They are shown in Table 3 in Annex.

The main goal of the financial product is to provide instruments for households to repay investments from

their heating bill savings.

Households have opportunity to repay the cost of EE projects (EE loan servicing) through small monthly

payments. This payment shall be less than the savings in bills for heat.

The actual financial product (grant) should depend on:

Obtained energy certificate (rating)

Completeness of the project (a full refurbishment - better financial product)

Number of subsidy recipients (better financial products for subsidy recipients)

Operational scheme may be described as an eight-step process described below (example for multistory

buildings):

1. Energy audit development. Client selects standard project type (or its elements) with forecasted

cost and bill savings. Then client selects energy auditor (it can be independent engineer at first

stages) and makes request for energy certificate and audit via website. Then energy audit is

conducted (specific EE measures that need to be made with sequence and technical requirements)

and energy certificate is provided. Expenses for energy audit and energy certificate should be at

least partly compensated by the Fund.

2. Getting signatures of HHs. Energy auditor, or other interested market player together with head of

HOA or manager of the house, makes presentations to households and helps collect signatures for

decision to implement EE project and invest.



3. Selection of a construction company. For client convenience, the selection of the construction

company may be carried out through online platform provided by the Fund. Client selects

measures from those developed by energy auditor and posts them on online platform of the Fund.

Construction companies then make their offers (cost estimate) via the website, based on a set of

measures and client selects the best offer.

4. Submission of request to the Fund. Selected construction company develops detailed specification.

Clients (construction company or other body acting on their behalf) submit request to the Fund via

the online platform, which contains a detailed description of the project and is signed by client and

construction company. The Fund then follows a transparent two-stage approval procedure.

Approval is sent to the client, construction company and bank. After approval, energy auditor and

construction company get the first payment (no grant is issued at this stage)

5. Submission of request to bank. After project approval, client selects bank, based on financial

product offers, which are automatically calculated on the website based on the necessary loan

amount, monthly payment (% of bill savings) and repayment start date.

6. Construction work. Construction company gets approval from the Fund, first payment and starts

construction work. In the course of construction work, technical office of the Fund makes selective

on the spot checks.

7. Final report. After completion of construction work, construction company makes final report

which is co-signed by the client, and submits it to the Fund. Independent energy auditor provides

energy certificate, which is attached to the report. In cases where no significant changes to initial

request were made, the Fund follows a simplified approval procedure. Then construction company

and energy auditor get second payment.

8. Monitoring of actual savings. Actual savings are monitored by Technical Office. Level of savings of

each project is posted on the Fund’s website. In case of major deviations from average the results,

technical office checks the project.

At the bank level, money from different sources is accumulated in a special project account. These sources

include: cash payments from households, loans from bank’s credit department and grants from the Fund.

After approvals by the Fund, money is released to a construction company. (2 installments – each after

approval by the Fund). This scheme is shown in the Figure 6 below.

Figure 6. Bank’s operations deep dive

Soft loans can be provided at later stages




3.5. Transfer of subsidies to investments (S2I)

One of the most important elements of the concept is a revolving mechanism of transfer of household subsidies to investments (S2I). The idea behind that is to transfer part of the subsidies to energy efficiency investments, thus generating additional subsidy savings that can again be invested into energy efficiency. Such a revolving mechanism would:

Reduce the burden of subsidy payments on the budget (which can grow up to UAH 80 billion in

2017 after the next wave of rate increases)

Enhance living conditions of vulnerable households

Improve a large part of the country’s housing stock

One of the most efficient ways to enable such a mechanism would be to monetize subsidies in the form of

cash payments to special household accounts at a state bank. Money from these accounts could be used

only for utility bills payments that can be automated and investments in energy efficiency projects.

Monetization of subsidies would:

Make the subsidy allocation scheme simple and transparent

Provide feasible instruments for households to invest in EE and stimulate savings

Provide needed cash to DHCs and Naftogaz

Inflow additional liquidity to state banks

In the S2I concept, the following mechanisms for transferring subsidies to EE investments are foreseen:

1. Gradual decrease of subsidies budget through:

a. Fixation and gradual increase of minimum payment

b. Norms recalculation after a certain grace period, that equals period for execution of first

EE measures (e.g. I.H.S. installment or replacement of gas boiler).

2. Part of saved subsidies is transferred to the Fund (separate budget line)

3. Monetization of subsidies via payments to special household accounts. They can then be used for

investments in energy efficiency.

4. Energy Efficiency Fund as seen by customers

4.1. Customer journey

The customer (household, homeowners association, other) journey is a six-step process:

1. Preparation of project technical documentation. Customer selects project type and an energy auditor to develop an energy audit via the online platform. After that, the customer selects projects they would like to execute and chooses specific proposition of a construction company.

2. Fund requests. Customer (or construction company on his or her behalf) makes a request to the Fund via the online platform. They can see a clear deadline for approval and status of their request on the website. Approval is posted on the website and sent to the customer, construction company and bank (after step 3)

3. Bank selection. Customer fills out necessary information (loan sum, monthly payment (% of forecasted bill savings), start date of repayments and financial products of different banks are automatically calculated. Based on that, the customer selects a bank, if loan is needed to co-finance the project.

4. Construction work. After project approval, construction company receives first payment and executes the project

5. Acceptance and submission of final report. After completion of the construction works, customer signs the construction company’s final report. Energy auditor issues new energy certificate and



then construction company submits final report. Grant is paid directly to construction company, when project is approved.

6. Repayments. Loan repayments start after the grace period, when actual bill savings are achieved. Worth mentioning that monthly payments are less than bill savings, which makes EE measures economically attractive for households.

4.2. Online platform and steps required by the customer

Online platform is a Fund website that has the following features:

Educational and promotional materials – benefits of EE measures, potential savings, list of completed projects with results (cost, bill savings, real estate cost, etc.)

Information about typical projects for each house type

Tool for quick cost estimation and potential savings of EE measures for different types of houses

Platform for requests for energy audit and certificates

Instrument for construction company selection

Platform for submission requests and tracking status

Information of available financial products and requests to banks

Online chat, Q&A

Example of possible online platform interface is shown in Figure 7.

Figure 7. Online platform interface


4.3. Customer’s potential cash flow

Average household cash flow after energy efficiency project implementation (Package 3, with 2017 rates) is shown below:

Annual household bill – UAH 14,000



Annual bill savings after EE project + UAH 8,500

Annual loan payments – UAH 6,500

Net annual household savings + UAH 2,000

Net annual household savings after loan repayment period + UAH 8,500

Apart from immediate bill savings, households will receive additional benefits that should be clearly stated in the Fund’s communication campaign:

1. Bill savings that can be much more than a future loan payment (e.g. in case of a rate increase to Poland’s level, savings will be twice as large as the loan payment)

2. A more comfortable, better heated and nicer house 3. Higher value of real estate after energy efficiency project

4.4. Ways to approach vulnerable customers (subsidy recipients)

Subsidy recipients represent a large part of the Ukrainian population (up to 50% of households are forecasted for 2017). Most of these vulnerable clients have neither financial resources nor incentives (“government covers bills anyway”) to invest in energy efficiency projects. Therefore, additional mechanisms to mobilize this population group should be provided:

Increasing awareness by:

TV news and public speeches by politicians, official, experts etc.

Communication campaigns via tailored channels (i.e. post offices, banks etc.)

Direct mailing of leaflets and educational materials on utility bills

Fostering word of mouth – collaboration with GeK, social workers, concierges, public organizations, etc.

Providing additional incentives through:

Gradual decrease in subsidy payments (details are above in the document)

Minimum payment decrease after EE project (proportional to achieved savings or higher energy class of the building)

Possible loss of subsidies in case of investment decision blocking by HoA or managing company

Providing additional instruments in the form of:

Monetization of subsidies on special accounts

More generous financial products to subsidy recipients

Covering full cost of the project for subsidy recipients (for some projects)

4.5. Communication campaign

Communication campaign should play an important role in:

Proposing Fund products

Educating customers on the energy efficiency concept and reasons behind rate increases and

Raising awareness about energy efficiency measures and the Fund



Communication campaign should be designed according to stages of the customer decision process: Trigger (need to decrease energy bill) – Inclusion in consideration set (awareness of EE measures and the Fund) – Active evaluation (assessment of Fund products) - Moment of purchase (decision about the program) – Post-purchase experience (experience from the program and visibility of results). For each step, different messages and communication channels should be used. Furthermore, channels and messages should be tailored to specific social groups (i.e. country poor, city poor, country middle class, city middle class)

5. Fund financial model

5.1. Government financing needed

At the moment, there are too many unknown factors to build an accurate financial forecast. Nevertheless, four different scenarios were created based on aspirations in terms of percentage of households that will implement EE projects in the next five years,

The basic scenario implies the following five-year realistically achievable targets:

Multistory houses:

40% of houses will implement package 1


Individual houses:



Basic scenario implies that the Fund will start operations in early 2017, its products will be attractive to both households and municipalities, and incentives will be sufficient to drive fast implementation of Energy Efficiency projects. This scenario assumes that all bottlenecks and problems of CE programs will not be reapplied to the Ukrainian Fund. Also, it undertakes that incur, Fund products will correspond to household needs and that communication campaigns will run efficiently. Calculation of these targets was based on the deployment rate of similar programs in CE countries.

Total financing needed by the Fund in the first five years under a basic scenario is shown on Figure 8 in Annex.

Model assumes slow deployment in the first two years and scale up after year three. Scale up should happen due to:

Growth of program acceptance due to first positive examples

Optimization of Fund products and their delivery mechanisms

Growth of construction company capacity.

The model also assumes that main Fund products will initially be grants, but since 2019 special “soft” loans will be introduced, that can be financed through external, taken by the Fund. (i.e. from IFIs).

After the Fund attracts customers on a large scale (presumably in 2-3 years), soft loans and financial leverage would be necessary, through IFI loans, etc., otherwise required financing would be too large for the State budget and net cash flow of government finances would be negative.

5.2. Results of the Fund’s operations

Results of the Fund’s creation fall into three major categories:

1. Savings on gas and heating bills

2. Subsidy savings

3. New jobs and additional taxes



Forecasted results of the Fund’s operations for 2021 are below:

Gas savings – 1,5 bcm3 per year (Reducing gas imports by UAH 9,1 billion)

Subsidy savings – UAH 5 billion per year

New jobs created – 75,000

Additional tax revenue from VAT, income, salary – more than UAH 10 billion per year

In addition, the Energy Efficiency Fund would have a positive impact on the Ukrainian trade balance

because of FDIs attracted in the field.

Achieving this results require:

Financing the Fund from State Budget – UAH 1,3 billion in 2017 and gradual increase up to UAH

4,7 billion in 2021

Financing by donors – on average UAH 1,2 billion per year

Attraction of external loans by the Fund starting from 2019 (with 4-7% interest rate, possibly with

State Guarantees)

This calculation implies the following data and assumptions:

Gas consumption. Savings – 15% from packages 1,2, 50% from packages 3,4

Average heating bill for multistory building is UAH 2376 per month (60m2*0,025 Gcal per m2 * UAH

1584 per Gcal), and for individual houses it is UAH 1806 per month (1517m3 per year* UAH 7,16 /6

months)

Subsidy savings are calculated based on UAH 80 billion forecast for 2017

Calculation of new jobs creates is based on estimation of # of FTEs required to fulfil the project:

package 1 – 0,33 FTE (4 people x 20 working days), package 2 – 0,02 FTE (2 people x 2 working

days), package 3 – 2,1 FTE (5 people x 100 working days), package 4 – 0,25 FTE (3 people x 20

working days)

Additional tax revenue is calculated based on 25% effective tax rate (VAT + income tax + other) and

additional taxes from new employees



6. Next steps

In order for the Fund to become operational in 2017, several important steps should be taken this year:

1. Concept approval by the government and CMU resolution to create the Fund – by June 2016

2. Adoption of the Energy Efficiency Fund law by Parliament – October 2016

3. Creation of a new legal entity and election of board members – December 2016

High level plan for the Fund’s creation is shown in Figure 8.

Figure 8. Plan for the Fund’s creation


Apart from that, effectiveness of the Fund would depend on adopting legal base in the energy efficiency

field. Forecasted timings of key legislative acts are below:

Table 2. Action plan of legal changes

Adopt concept and action plan of EE Fund creation Till 30.06.2016

Adopt Law of Ukraine “On housing and utilities services” Till 31.08.2016

Take decision and adopt scheme of full or partial monetization of household

utility subsidies Till 31.08.2016

Adopt Law of Ukraine “On Energy Efficiency Fund” Till 31.10.2016

Adopt Laws of Ukraine regarding EE of houses and regarding metering Till 31.10.2016

Adopt Changes in the Budget Code of Ukraine Till 30.11.2016

Create new legal entity “EE Fund” Till 30.11.2016



7. Annex

Table 3. Regulation of operation of similar funds in EU countries

Country Name of Program/Fund Activity is regulated Source of Funding

Poland

Thermorenovation Fund

By a separate law, Journal of Laws 2008, No 223, item 1459

State Budget

Lithuania Jessica Fund

By a separate law, No XII-1054 as of 17.07.2014

State Budget and Structural Funds of the EU

Czech Republic

New Green Preservation - third part of the Green Preservation program

By a separate law, No 468/2012

State Budget and revenue from CO2

trading

Latvia Energy efficiency improvement in multistory buildings

Until recently - several laws and regulations

Now - draft Law on Energy Efficiency

State Budget


Table 4. Packages of energy efficiency measures

Multistory Houses Individual Houses

Package 1 Package 3 Package 2 Package 4

Measures Heat metres

Individual Heating Stations

System balancing

Pipes and lagging replacement (common areas)

Windows in common areas

Entrance doors

Thermo-

insulation of

roof,

basement,

walls

Replacement

of all windows

Replacement

of all pipes

Radiator

replacement

Front door

replacement

I.H.S + meter

(if not yet

installed)

Gas boiler

replacement

for more

eddective

Thermo-

insulation of

roof, basement,

walls

Window

replacement

Front door

replacement

Pipe

replacement

Cost per HH UAH 6 500 UAH 8 400 UAH 11 000 UAH 100 000

Energy saving 15% 15% 50% 50%



Figure 9. Scale of financing of EE measures in the basic scenario, EUR mln


1,292

3,699 3,3614,444 4,675

745

926 1,151

1,4111,694

2017 2018 2019 2020 2021

State Budget Donors

energy efficiency fund: concept and creation plan

Government & Nonprofit