Energy efficiency to the fore in Latvia's EU funds plans - but will it be enough?

As Latvia's authorities look to finalise EU funds allocations for the 2014-2020 period, the nation's energy supply – where it is sourced from and how it is being used – remains the elephant in the room. As in every economy, energy is a crucial sector, with significant influence over the overall national economy and its development. An ambition and a challenge for Latvia is how to improve its energy independence, and quickly.

The energy industry in Latvia is heavily dependent on imported fuel, and this currently means sourcing natural gas imports chiefly from neighbouring Russia. These imports are vital for heating – 60 percent of the energy used in Latvia goes on heating. There is, too, a technically poor heat supply system to contend with, that continues to pose problems for efficient energy efficiency consumption. Indeed poor energy efficiency in Latvia persists: an average Latvian household consumes more than double that of the EU average.

Yet it is clear that if Latvia wants to become more energy independent, then it must take steps to become more efficient in its energy use, it must consume less and also create a better environment for local renewable energy production and use. The new round of EU funding ought to be a key opportunity to address this.

And, thus, energy efficiency is one of the top priorities within Latvia's current nation development strategies, as well as for the EU Structural funds for the 2014-2020 budgetary period. Over the next seven years, according to the latest plans, just over 333 million euros will be aimed at energy efficiency measures and the energy sector more widely, of which 150 million euros is to be specifically directed towards improving energy efficiency in the housing sector.

This level of EU funds support, though, will need to be implemented with due consideration of where and how support for energy efficiency measures in 2007-2013 went well, and not so well. As Bankwatch member group Latvian Green Movement's monitoring work in the previous period pointed out at the time, Latvia's investment in the housing sector reached the maximum available amount financed by the European Regional Development Fund (ERDF) – 89.3 million euros. One of the reasons behind such substantial interest in and tapping of these domestic renovation funds was the successful reach of the 'Live warmer' awareness raising campaign, which has helped to implement projects in around 400 multi-dwelling buildings – the project is still being implemented, with some delays, in more than 490 buildings.

Nonetheless, various compromising factors took the sheen off these efforts, chief among which was the length of the payback period related to household-targeted energy efficiency investments in the previous EU budget period. Such projects implemented in the 2007-2013 period tended to be considered 'non-bankable', as the payback period is estimated on average at 22-23 years.

Moreover, certain regulatory barriers proved to be a drag on progress, especially in the regions: there were no possibilities to obtains grants – rather than loans – for the carrying out of even economically sound projects. A further obstacle to achieving improved energy efficiency in the residential sector has also been experienced as a result of excessive administration and procurement procedures, and, despite promotional campaigns, still enduring low levels of public awareness and communication between multi-dwelling building owners.

A combination of these factors has resulted in many of the projects not being up and running within the intended deadlines, contract breaches due to the poor implementation of construction work as well as cost increases linked to procurement procedures and various bank-related complications regarding loan conditions.

To get to grips with and overcome the teething problems experienced over the last seven years, a new finance model, related to the introduction of the EU's energy efficiency directive, has been conceived for energy efficiency measures in Latvia's residential building sector.

The plan is to develop an Energy Efficiency Fund that will use ERDF money and the state budget to allocate loans – with a grant element – via a public bank. Low interest rate loans (forseen at two percent + EURIBOR) will then guarantee finance for beneficiaries to start relevant project implementation and will be used to cover 100 percent of the construction and monitoring costs of the projects.

An innovation of the package involves 25-35 percent loan discounts – on a sliding scale – accruing after the project implementation if the energy efficiency measures are implemented successfully: a 25 percent discount if energy consumption after the renovation is less than 90 kW/m2; 30 percent if less than 80 kW/m2, and; 35 percent if less than 70 kW/m2).

The loan approach for such projects can been seen as positive as, according to stakeholders involved in this issue such as municipalities, energy agencies and flat owners, there have been many instances of interested parties being unable to realise energy efficiency projects due to limited or no access to loans from commercial banks in the previous funding period.

Notwithstanding this, concern remains that loans continue to be regarded as problematic – no doubt an experience acutely felt by many Latvians during the financial crisis. Moreover, it is still far from clear how this mechanism is planned for actual implementation and whether the criteria for taking such a loan will be equally motivating for everyone. Transparency issues related to how the EU funds money will be processed by the banks are a further grey area for now.

Indeed, as the Latvian Association of Local Municipalities points out: “Currently the Cabinet of Ministers regulation related to the conditions for issuing these loans contains essential requirements for renovation work implementers and borrowers that are not yet well defined, and the determination is left 'in the beneficiary's' competence. Based on this wording, it is not possible to assess whether and how residential buildings in municipalities will be able to qualify to meet the loan requirements. In addition, there is the risk of varying requirements and varying transparency for loan recipients.”

A flat owner, contacted for this article, in a small municipality close to Riga also believes that this model would not entice him to start renovation processes in his building as the support rate is still very low, and the financial calculations are dependent on a loan payback time of more than 20 years. In his view, many others will also be put off taking on loans with such a long payback period. He also points to the fact that it is still very difficult to convince other flat owners in multi-dwelling buildings to go for such projects, and that even convincing 50 percent of one's co-habitants is challenging.

The Latvian NGO Rural Development Forum have also communicated their concerns to Latvia's EU funds Managing Authority. Chief among these are the small support rate for the planned measures and fears that take up in the regions – in rural areas especially – will be very limited owing to economic restrictions and the high concentration of less-inclined older generations.

Thus, while energy efficiency is now being viewed as a priority for Latvia’s economic and even political stability, the simple fact of the matter is that this is not sufficiently reflected in the EU Funds Operational Program for the next seven years – some new mechanisms are planned, but question marks remain.

The concept of a 'revolving fund', as outlined above, is a start, but it is vital to expand on this in order to attract more public and private money. It is essential, too, to ensure that EU Funds investments flow via the fund in a transparent and efficient way.

One solution would be to provide low income households with targeted, tailored support (this is in fact an EU energy efficiency directive requirement, but it is not yet in place in Latvia) and to work more on public awareness.

Meanwhile, proposed EU funds allocations in Latvia for clean supply-side measures are – stunningly – almost completely lacking. The clean energy opportunities afforded by the new round of EU funding are being taken in Latvia, but not – seemingly – with enough ambition and innovation given the energy challenges we face. Seven years from now, the chances are that our energy independence glass will look more half empty than half full.

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