Interview: The potential for energy efficiency investments is enormous
Yevhen Bushma, Director of DTEK ESCO: “The growth of investments in the energy efficiency sector will continue, and Ukraine has great potential in this area”
The growth of investments in the energy efficiency sector will continue, and Ukraine has great potential in this area. This was stated by Yevhen Bushma, Director of DTEK ESCO, in an interview with InVenture.
– Yevhen Yuriiovych, can you comment on the data of World Energy Investment 2018, according to which energy efficiency investments are growing, although energy investments are declining? Approximately the same thing was said in last year’s report. Can we assume that this trend has already become sustainable?
According to World Energy Investment 2018, which was prepared by the International Energy Agency (IEA), global energy efficiency investments increased by 3% (236 billion dollars) amid a general reduction in energy investments by 2% to 1.8 trillion dollars.
How indicative is this fact? Let’s be cautious optimists. According to the forecasts of the IEA, energy efficiency investments should increase to 300 billion dollars by 2022. In general, the dynamics of investments in the energy efficiency sector slowed down by 6% compared to the previous year (in 2016, growth was 9%, or 231 billion dollars).
The indicator is average. For example, if global investments in energy efficiency of buildings and structures increased by 3% (140 billion dollars), in transport by 11% (40 billion dollars), therefore investments industry, on the contrary, reduced by 8% (down to 35 billion dollars).
– What influenced the growth of investments in energy efficiency?
The factors that influence these indicators are quite diverse. Here the following play a role: changes in the state policy in the energy efficiency sector and climate of the largest countries in terms of GDP, such as China, deceleration of development of the metallurgical sector, expansion of the construction sector, reduction in the cost of technology in the renewable energy sector. Correlation with world energy prices no longer plays primary role.
But the factor of diversification of investments in different energy sub-sectors is remarkable. It was especially vivid in the green bond market. The amount of such bonds for financing energy-efficient projects has tripled to 47 billion dollars and for the first time has exceeded the value of bonds for renewables and other energy uses.
In general, the attractiveness of energy efficiency investments is due to a number of reasons. It is believed that saving a unit of energy is about 2 times cheaper than producing it. Therefore, the energy needs of end users can be met not only through the construction of new generating capacities, but also through the rational use of an existing resource.
– What does the economy gain from investment in this sector?
Improving energy efficiency allows to reduce emissions to the environment, improve industrial safety, comfort for personnel of enterprises, owners of residential real estate, staff and visitors of commercial real estate, extending the service life of equipment, buildings, constructions, and to introduce innovations.
– What is the role of companies like yours in the sector?
According to the IEA estimates, energy service companies (ESCO) with a global market amount of 27 billion dollars play an important role in the world. They make it possible to improve the models for financing energy efficient projects and insure the risks of achieving energy savings.
– What is meant by energy service?
The essence of the energy service mechanism is that ESCO invests funds in customers’ energy-efficient projects and implements them on a turnkey basis, ensuring the achievement of a certain level of energy savings. If savings are achieved, the customer pays for the energy service from a part of the savings for several years. Upon completion of the contract, all upgraded equipment becomes the property of the customer. If savings are not achieved, ESCO does not receive a return on its investment. This is a risk-free tool for owners of building, constructions, infrastructure and enterprises.
– How developed is this instrument in Ukraine?
In the world, energy service has been used to finance energy efficiency projects for about 50 years. In Ukraine, the term “energy service” was introduced into legislation in 2015. The Verkhovna Rada of Ukraine then adopted the Law “On Introduction of New Investment Opportunities, Guaranteeing the Rights and Legal Interests of Entrepreneurs for Large-Scale Energy Upgrade”. The active attraction of investments in the upgrade of public sector buildings with the help of this tool began in 2017, when ProZorro public procurement system began holding tenders to attract energy service investors to upgrade public sector facilities (kindergartens, schools, hospitals, public buildings etc.).
According to the State Energy Efficiency and Energy Saving Agency of Ukraine, 190 energy service contracts were concluded in a year with approximately 15 investors in the amount of 200 million hryvnias (about 7 million dollars). Moreover, the amount of contracts does not reflect the amount of investment, but the amount of payment for the energy service to the investor, if savings are achieved.
Approximately the same amount of contracts (217 million hryvnias) is currently with DTEK ESCO. The company invests mainly in the industrial sector (energy, coal, mining) and, in fact, it doubles the energy service market in Ukraine with its projects.
The company has already invested 30 million hryvnias in 20 completed projects. The energy savings achieved by these projects range from 30 to 90%. For example, the upgrade of heating systems in public buildings (kindergartens) allows customers to save from 30 to 40% of thermal energy. Installation of frequency converters in pumping units allows to save from 30 to 60% of electricity, upgrade of industrial climate support systems allows to save about 50% of energy savings. The largest savings in percentage terms comes from the upgrade of electric lighting systems – from 70 to 90% energy savings due to installation of LED lights, replacement of cable networks, and installation of new panels.
The average payback period for projects in DTEK ESCO portfolio is up to 3 years. The internal rate of return of projects (IRR) is more than 100%. At the same time, the company calculated that every 1 million hryvnias of investments in ESCO projects over the next 10 years will bring customers about 8 million hryvnias savings in energy costs (even with the payment of energy services). Such results instill cautious optimism regarding the prospects for the development of the energy efficiency market and energy service in Ukraine in general.
– How do you assess the prospects and potential of Ukraine? How much investment can the energy efficiency sector of our country attract?
The potential of Ukraine to attract investment in this sector is enormous. The energy intensity of the Ukrainian economy is 3 times higher than the European average. In order to achieve the European level of energy efficiency, according to various estimates, Ukraine needs from 25 to 60 billion dollars of investments. In the sector of housing, production and supply of thermal energy, the public sector can improve energy efficiency by 50 to 60%.
In 2017, DTEK ESCO analyzed the efficiency of using heat energy in buildings of 16,000 legal entities in Kyiv. It turned out that 1,000 buildings in Kyiv can reduce their heating costs by an average of 5 times if they carry out comprehensive energy efficiency activities. Among such buildings were offices of central government, large state-owned enterprises, housing cooperatives etc.
Considering such “deposits of inefficiency”, there are plenty of opportunities for the application of foreign investors’ resources
– What are the most important legislative initiatives that encourage investment in this sector?
In order to reinforce the potential for saving (and profitability for investors) with institutional capabilities, a regulatory framework is being created in the country that will launch a full-scale energy efficiency market in Ukraine.
For example, the Law “On Energy Efficiency of Buildings” has already entered into force this year (since July 1, 2019 most state and public buildings will be required to undergo energy certification), the Law “On Commercial Accounting of Services for Heat and Water Supply” is in force, which should to provide a total accounting of energy resources, and in accordance with the Law “On the Energy Efficiency Fund” the state mechanism of grant support for the thermal upgrade of the residential sector can be launched around the beginning of 2019.
Obviously, this is a drop in the ocean against the background of the general needs for energy efficiency investments in Ukraine. However, if, due to state activity and favorable regulatory environment, projects in the residential and public sector show good results with minimal risks, private foreign investors will gradually catch up. It is important for both parties not to miss the moment.