Review of and Guide for Financial Support Facilities For

FINAL REPORT “Review of and Guide for the Financial Support Facilities Available For Renewable Energy and Energy Efficiency in Energy Community Partner Countries”

INOGATE Technical Secretariat and Integrated Programme in support of the Baku Initiative and the Eastern Partnership energy objectives

Contract No 2011/278827

A project within the INOGATE Programme

Implemented by: Ramboll Denmark A/S (lead partner) EIR Global sprl. The British Standards Institution LDK Consultants S.A. MVV decon GmbH ICF International Statistics Denmark Energy Institute Hrvoje Požar

Document title Final Report “Review of and Guide for the Financial Support Facilities for Renewable Energy and Energy Efficiency in Energy Community Partner Countries” Document status Final

Name Date Prepared by Heikki Noro 10 January – 17 March 2016 Majda Bunjevčević 10 January – 17 March 2016

Checked by Adrian Twomey 18 March 2016

Approved by Peter Larsen 18 March 2016

This publication has been produced with the assistance of the European Union. The contents of this publication are the sole responsibility of the authors and can in no way be taken to reflect the views of the European Union.

Table of Contents List of abbreviations ...... 6 1 EXECUTIVE SUMMARY ...... 1 2 GENERAL CONCLUSIONS AND RECOMMENDATIONS ...... 3 2.1 CONCLUSIONS ...... 3 2.2 RECOMMENDATIONS ...... 5 3 INTRODUCTION ...... 7 3.1 OBJECTIVES ...... 7 3.2 METHODOLOGY ...... 8 4 DRIVERS FOR FINANCING ENERGY EFFICIENCY AND RENEWABLE ENERGY ...... 9 4.1 ENERGY EFFICIENCY ...... 9 4.2 RENEWABLE ENERGY ...... 10 5 INTERNATIONAL DEVELOPMENT FINANCING INSTITUTIONS AND DONORS ...... 10 5.1 INTRODUCTION ...... 10 5.2 THE INTERNATIONAL FINANCIERS ...... 12 5.2.1 Donors ...... 14 5.2.2 Dedicated EE/RE Related Funds Facilities ...... 15 5.2.3 Multilateral Development Banks (MDB’s) ...... 19 5.2.4 Bilateral Development Finance Companies ...... 23 5.3 LOCAL FINANCIERS ...... 25 5.3.1 Commercial Banks ...... 25 5.3.2 Local Investment Funds ...... 25 5.3.3 Public Financing ...... 25 6 UKRAINE ...... 27 6.1 ECONOMY ...... 27 6.2 ENERGY SECTOR ...... 27 6.3 DEMAND SITUATION AND PROSPECTS ...... 30 6.3.1 Energy Efficiency ...... 30 6.3.2 Renewable Energy ...... 33 6.4 FINANCING SUPPLY AND FLOWS ...... 36 6.4.1 Banks and Financial Sector ...... 36 6.4.2 Financing Practices and Terms ...... 37 6.4.3 International Investment Financing ...... 37 6.4.4 Local Commercial Financing ...... 47 6.4.5 International Grant Financing ...... 48 6.4.6 Local Public Financing ...... 52 6.5 FINANCING GAPS AND NEEDS ...... 54

6.5.1 Energy Efficiency ...... 54 6.5.2 Renewable Energy ...... 55 7 GEORGIA ...... 57 7.1 ECONOMY ...... 57 7.2 ENERGY SECTOR ...... 57 7.3 DEMAND SITUATION AND PROSPECTS ...... 59 7.3.1 Energy Efficiency ...... 59 7.3.2 Renewable Energy ...... 63 7.4 FINANCING SUPPLY AND FLOWS ...... 66 7.4.1 Banks and Financial Sector ...... 66 7.4.2 Financing Practices and Terms ...... 67 7.4.3 International Investment Financing ...... 67 7.4.4 Local Commercial Financing ...... 74 7.4.5 International Grant Financing ...... 77 7.4.6 Local Public Financing ...... 80 7.5 FINANCING GAPS AND NEEDS ...... 81 7.5.1 Energy Efficiency ...... 81 7.5.2 Renewable Energy ...... 82 7.5.3 Financing Gaps ...... 82 8 MOLDOVA ...... 83 8.1 ECONOMY ...... 83 8.2 ENERGY SECTOR ...... 84 8.3 DEMAND SITUATION AND PROSPECTS ...... 86 8.3.1 Energy Efficiency ...... 86 8.3.2 Renewable Energy ...... 91 8.4 FINANCING SUPPLY AND FLOWS ...... 94 8.4.1 Banks and Financial Sector ...... 94 8.4.2 Financing Practices and Terms ...... 95 8.4.3 International Investment Financing ...... 95 8.4.4 Local Commercial Financing ...... 100 8.4.5 Public Financing ...... 102 8.4.6 International Grant Financing ...... 103 8.5 FINANCING GAPS AND NEEDS ...... 106 8.5.1 General ...... 106 8.5.2 Energy Efficiency ...... 106 8.5.3 Renewable Energy ...... 108 8.5.4 Financing Gaps ...... 108

9 ANNEXES ...... 108 9.1 ANNEX 1: Field Research (28 October-20 November, 2015) - List of Interviewed Institutions and Persons ...... 109 9.2 ANNEX 2: Overview of key EE and RE Sector Financing by Multilateral Development Banks 2010-2015 in Ukraine, Georgia and Moldova ...... 115

List of abbreviations

ADB Asian Development Bank AEE Energy Efficiency Agency of the Republic of Moldova ANRE State Agency for Energy Regulation of the Republic of Moldova BMZ German Federal Ministry for Economic Cooperation and Development BSTDB Black Sea Trade and Development Bank CEB Council of Europe Development Bank CHP Combined Heat and Power CIF Climate Investment Funds CTF Clean Technology Fund DCA Development Credit Authority DCFTA Deep and Comprehensive Free Trade Area DFC Development Finance Institutions DH District heating DSOs Distribution System Operators EBRD European Bank for Reconstruction and Development EC European Commission ECT Energy Community Treaty EDFI European Development Finance Institutions EE Energy Efficiency EFSE European Fund for Southeast Europe EIB European Investment Bank EnC Energy Community ESCO Energy Service Company EU European Union EUR Euro E5P Eastern Europe Energy Efficiency and Environment Partnership Fund FIM Finance in Motion FMO Netherlands Development Finance Company GCF Green Climate Fund GCF Georgia Co-Investment Fund GDP Gross Domestic Product GEF Global Environment Facility GEL Georgian Lari GGF Green for Growth Fund GIZ Gesellschaft für Internationale Zusammenarbeit GNERC Georgian National Energy and Water Supply Regulatory Commission GUF German Ukrainian Fund GW Gigawatt GWh Gigawatt hour HH Households HoAs Housing Associations HPP Hydro Power Plant IBRD International Bank for Reconstruction and Development IEA International Energy Agency IFC International Finance Corporation IFIs International Financial Institutions IMF International Monetary Fund KfW Kreditanstalt für Wiederaufbau ("Reconstruction Credit Institute") kWh Kilowatt hour MDBs Multilateral Development Banks MERP Municipal Energy Reform Program (USAID)

MFOs Microfinance Organizations MoSEFF Moldovan Sustainable Energy Financing Facility MoREEFF Moldovan Residential Energy Efficiency Financing Facility MPSF Municipal Support Facility (EIB) MSIF Moldova Social and Investment Fund MSME Micro-and Small and Medium-Sized Enterprises MW Megawatt MWh Megawatt hour NEEAP National Energy Efficiency Action Plan NEFCO Nordic Environment Finance Company NEURC National Energy and Utilities Regulatory Commission of Ukraine NFF Neighbourhood Finance Facility (EIB) NGO Non-governmental organisation NIB Nordic Investment Bank NIF Neighbourhood Investment Facility NPP Nuclear Power Plant NREAP National Renewable Energy Action Plan OECD Organisation for Economic Co-operation and Development OeDB Austrian Development Bank PCB ProCredit Bank PCs Partner Countries (Energy Community Treaty) PPA Power Purchase Agreement RE Renewable Energy RES Renewable Energy Sources SAEE State Agency on Energy Efficiency and Energy Saving of Ukraine SEAF Small Enterprise Assistance Funds SEAP Sustainable Energy Action Plan SEFF Sustainable Energy Financing Facility SHPP Small Hydropower Plant SIDA Swedish International Development Agency SMEs Small and Medium-Sized Enterprises SWUK SIDA-EBRD Ukraine Energy Efficiency and Environment Consultant Cooperation Fund TA Technical Assistance TCs Target Countries TPP Thermal Power Plant UAH Ukrainian hryvna UCPP Ukraine Cleaner Production Programme (IFC) UKEEP Ukraine Energy Efficiency Programme UNDP United Nations Development Programme UNIDO United Nations Industrial Development Organisation UREEFF Ukrainian Residential Energy Efficiency Financing Facility USAID United States Agency for International Development USD US dollar USEFP Ukraine Sustainable Energy Finance Project (IFC) USELF Ukraine Sustainable Energy Lending Facility USIF Ukrainian Social and Investment Fund WB World Bank WBG World Bank Group

1 EXECUTIVE SUMMARY Energy Efficiency and Renewable Energy are among highest priority targets within the international development financing and assistance programs and throughout the donor community. The three target countries (TC’s) of this study, Ukraine, Georgia and Moldova, are at early stages of Association process with the EU, but are already committed to a more environmentally sound and more energy-efficient economies. The EU, bilateral donors, and development financiers have given their support to the TC’s in terms of technical assistance and financing for these purposes. Each TC has access to a wide variety of financing instruments and sources varying from grants to commercial investment financing. This has been made available directly from financiers or from local financial intermediaries or Governments. The supply of financing has been good enough to help the financial market move and take initial steps towards “greener” investments. The eventual decision makers, the end users, when deciding whether to engage in EE improvements or whether to invest in renewables or to convert fuels to renewables are reliant on positive “drivers” to persuade them to take action and take a loan or invest their own funds. The financing demand factors and market conditions are the most important determinants in this process, not the availability of financing per se. The TC’s face today adverse economic circumstances, low income levels and profitability of the economic units, weak local currency, limited risk taking ability of the local commercial financiers and lack of local currency grants and affordable long-term loans. All these factors are either stalling the EE/RE financing markets or considerably slowing down the “market pull” in all TC’s. The single biggest deterrent is the high price of borrowing weighed against the profitability of investments. The Multilateral Development Banks carry the burden of providing the volumes of loan and equity financing for the past and current EE/RE investments. Their EE financing is normally channelled through public sector lending towards energy infrastructure improvements or through the healthiest local commercial banks to retail corporate, SME, and individual users. Large scale RE financing has been generally provided as private sector direct lending or equity investments, whereas small-scale RE clients are serviced through the local banks. EU has taken the role of the largest grant provider to the sectors in the absence of sufficient local budgetary funds. The necessary footwork in getting the enabling environment in place has been greatly supported by EU and key donors. However, still a lot remains to be done, in terms of e.g. energy-efficient building codes, ESCO market development, Home-Owner Association support and other facilitating moves by the authorities. Ukraine has a highly energy intensive and inefficient economy requiring major overhaul and EE investment especially into energy industry (generation and distribution) and heavy industry. The SME sector is facing competitiveness challenges currently diversifying from Russia to the EU markets. The residential sector, dependent especially on heating is responding to available limited financial incentives on the single home front, but needs more public financial support to overhaul old residential buildings. The energy bill subsidies for poor households are their lifeline but also help them to borrow for minor EE improvements. The full costs recovery of sharply increased gas import costs is gradually starting to give more impulses to energy savings among users.

Only the healthiest and recapitalized state and private banks continue to service corporate and private EE/RE clients in the midst of the crumbling oversized commercial banking sector, now getting downsized and restructured. Most of EE and RE sector major investments are public sector financing-driven. The IFI and foreign bank equity injections, EE/RE and SME credit lines and “blended” financing facilities - such as EBRD’s Sustainable Energy Financing Facilities (SEFF’s) “sweetened” by grant “pay-back” and TA components - have enabled the banks to provide initial financing and to help open the markets and EE activities among SME’s despite of high nominal cost of borrowing. The Government’s current plans of setting up of a National Energy Efficiency Fund would help partly fill the gap of limited availability grants and concessional reasonably priced local currency loans. Georgia has a market oriented and private sector approach also towards EE and RE support and financing. The well-regulated and liquid commercial banks service SME clients and home-owners through a number of IFI credit lines, which are abundantly available. The EBRD blended financing SEFF’s have moved the markets thanks to the grant “sweeteners”. The high price of borrowing due to weak currency and lack of affordable medium term local currency loans has, however, made the market move slowly. EE appears to be less of the priority among user groups, partly due to milder climate. The country’s efforts to improve energy security are banking on massive investments into hydropower development. The investment projects are supported and catalysed by the Government through risk financing by The Partnership Fund and long term favourable Power Purchase Agreements (PPAs) to investors. This together with the country’s favourable foreign investment climate has enabled the partners to mobilise investment financing from foreign investor partners and IFI’s. Small-scale RE potential exists in rural areas, but is not well exploited yet due to lack of affordable loans and grant “seed” financing. Moldova’s economy has been heading downwards. Energy needs being largely dependent on imports the country has faced sharply increased energy, especially gas prices. The most dynamic sector for EE is the export oriented SME mainly agro-based industry making use of the blended financing by EBRD and active smaller and medium sized banks. State banks and selected large banks have been immobilised due to the recent massive irregular lending losses amounting to more than ten per cent of the country’s GDP. This has driven the financial sector in turmoil and a virtual stand- still. The IFI’s have also frozen all further lending to Moldova due to the scandal. The EE and small scale RE investment financing has been fully reliant on IFI credit lines. Loans offered by the local banks are too expensive for many end-user groups, as banks index longer term loan repayments to US Dollar or Euro. The Government’s grants schemes e.g. for agroindustry and export sectors blended with bank loans have enabled limited EE/RE improvements, especially through smaller commercial banks. The Government has been supporting EE/RE financing with the help of the EU budget support. The EE Fund has been operational for three years until recently, but has currently a funding gap and is undergoing restructuring and governance reform sponsored by the EU and supporting bilateral donors. Poor families receive grant subsidies for heating and electricity as social safety net in the wake of increasing tariffs.

2 GENERAL CONCLUSIONS AND RECOMMENDATIONS 2.1 CONCLUSIONS The desk review has revealed that there exists an array of international financing sources and various financing sources and instruments in support of the three target countries under review (hereinafter TC’s). EE and RE being among highest priorities among the IFI’s and donors, it is also reflected in the high levels of financial support in comparison with other sectors. The financing volumes have been strongly increasing during the last 7-8 years.

The desk and field study results can be crystalized in one main conclusion: The international IFI financing and donor grants have helped open these markets, but improved enabling environment and more affordable financing is needed to help pick up the momentum.

CONCLUSION 1: The needs for EE are huge in all three countries and work is at very early stages in terms of progress EE offers very important opportunities for better utilisation of domestic resources and more efficient use of scanty national financial resources for energy production, transmission, distribution, and final consumption. The needs for mobilisation of domestic financing resources greatly surpass the current and imminent domestic capacities. The EU pre-access process has helped jump-start the work, but it appears that the EE national targets are too ambitious and have to be scaled back. CONCLUSION 2: Awareness of the benefits of EE among local stakeholders already exists Substantive work has been made by local agencies and financiers, international TA by banks and donors as well as the NGO sector in increasing awareness. More work will further help the cause but is not the most critical deterrent to investments. CONCLUSION 3: The EE markets have been opened but are not moving in a larger scale The main causes for limited action can be pinned down to the weak economic environment in the TC’s. This is reflected through e.g. economies as a whole, fragile and shallow financial sectors especially in Ukraine and Moldova, lack of affordable local currency loan financing, low affordability levels among households and limited budget funds for subsidies. The main focus is on immediate “survival” and not in ideal energy consumption patterns. CONCLUSION 4: There still exist limited drivers for systematic and widespread EE investment taking place in the TC’s Sustainable financing can only happen when there are prerequisites for it to prevail. The common saying - “You cannot push with a rope” – applies also in this case. There is currently limited demand pull in all sectors of the economies. The corporate sector is now focusing on diversifying export markets from Russia and sees limited “upside” (i.e. earning opportunities) in EE or RE investments given the cost of financing. The householders have either low affordability, rising energy prices do not work yet as incentive, or they limit their EE investments into increased comfort when affordable. The municipal and government sectors struggle with limited budget funds and borrowing capacity for enabling their investments for common good.

CONCLUSION 5: EE on urban residential sector is underfunded and requires sizeable structural investments in heating systems beyond household financial means Decentralised heating systems are getting more common in urban areas where conversions to energy efficient solutions are beginning to take place. However, old residential multi-apartment buildings would normally require substantial structural changes and investments, which are not feasible today. Municipalities have started to financially support the sector but lack budgetary funds.

CONCLUSION 6: With the exception of the dynamic hydropower sector in Georgia, renewable energy still plays a very minor role in the countries’ energy balance and will do so in the near future

The focus in the TC’s has been in increasing energy security in terms of less dependence on Russian gas and electricity supply and demand side management has attracted less attention. Large scale hydro, wind and solar power investments rely on foreign private investors and international financing requiring stable investment climate, only prevailing in Georgia for the time being. Increased utilisation of biomass appears to have potential and local application possibilities in all three TC’s, but lacks organised input markets and local currency financing. Wind and solar investments are few and domestic investment interest appears so far limited. Favourable feed-in tariffs play a key role for any RE investments beyond captive use, as has been demonstrated in Ukraine and Georgia. CONCLUSION 7: Given the current state of the economies and the domestic financial sectors, most of the financing burden for the EE and RE investments is currently carried by the International Financing Institutions and foremost by the key MDB’s, (EBRD, EIB and the World Bank Group) The investment loans, extended directly to larger projects and channelled through local financial intermediaries to smaller ones, are often being blended with grants to enable them to reach towards more vulnerable groups and to make the financing terms more attractive to the clients and to help open the EE/RE markets. CONCLUSION 8: Pricing and terms of loan financing are untenable in all TCs Very limited EE and small scale RE investments will take place with the prevailing terms. Relatively high commercial risks and weak currencies make the terms unattractive to clients. Even the public sector IFI lending intermediated through local banks cannot reach all potential client groups. The blending of loans with investment grants and grant TA help softening the terms, but has not yet lead to sustainable local financing in a big way. The lack of affordable local currency loans will deter much EE improvements. CONCLUSION 9: Grant financing has been instrumental to move the EE and RE sectors and financing Grants, especially those from the EU, have played a vital role in a) helping establish the necessary enabling environment in terms of legislation and “rules of the game”; b) getting pilot operations and experiences in place suitable for up scaling; c) financing energy audits and EE plans and d) blending grants with investment loans to make them affordable and well-targeted. All this continues to be needed, but should be increasingly directed to leveraging local financing, as already proven effective by the EBRD Sustainable Energy Facility (SEF instruments).

CONCLUSION 10: The failure of international financing in helping establish sustainable local currency financing markets constitutes the biggest EE and RE financing gap A number of positive steps have been taken by the IFI’s and donors without which not much activity would have taken place in these sectors. However, several areas would require more financial support. More specifically, the following further financing gaps can be singled out: a)non-existent, inoperable or insufficiently funded local EE grant funding facilities; b) lack of easily accessible small grants for EE and RE purposes; c) lack of risk-sharing instruments (e.g. risk guarantees) for enhancing affordable local currency loan financing by private commercial banks, d) limited public sector international concessional loan financing to support municipalities and viable state owned commercial banks constrained by low Government creditworthiness (especially Ukraine); and e) limited grant financing available to support small- scale equity investments in RE.

2.2 RECOMMENDATIONS Any grant, development lending or guarantee instruments, which would help to fill the gaps mentioned in Conclusion 10 above, would be helpful in promoting EE and RE investments. The time available to the team for desk research and especially for the field interviews (roughly a week per country) cannot allow for elaborate recommendations. However, the ones presented below stood out as the most evident needs as transpired during more than 60 field interviews carried out by the team in Ukraine, Georgia, and Moldova in November 2015.

1. Continuing support to improve business enabling environment As all the required legislation (especially secondary legislation level) is not all there yet, getting that done is the first step before any serious “demand pull” can be expected. One key area, where much work still needs to be accomplished is the area of building codes incorporating appropriate standard international EE principles. Another key area is the adoption of metering codes and standards. Further technical assistance in support of the work initiated by e.g. the Covenant of Mayors network would also help keep the momentum of the useful international initiative. It appears that some co- ordination and standardisation is needed among the support and TA targeted towards energy audits and supported by a variety of donors. Well targeted TA can help prepare the groundwork in anticipation of the market situation improving. 2. Guarantees for MDB’s for increased local currency financing The TC local financing markets are still too shallow for extensive local bond issues or are not in condition to do that. Combined with the tenor mismatch with local deposits this has led to a situation whereby sufficient funding for local currency lending at reasonable terms is not currently in place. EU guarantees towards European IFI’s would help establish new basis for availing for them to absorb the inherent currency risk and lending through local intermediaries to e.g. corporates and households in local currencies and on affordable terms. This would provide the best short-cut in these circumstances for allowing larger volumes of loan financing not to be limited only to the investments with quick financial returns, as is the case today. The team understands that such plans are already underway among European MDB’s and the EU. 3. Leveraging financing through NIF and E5P Regional grant facilities have proven useful in complementing IFI lending. Their planning and processing cycles are long, but have been accommodated by IFIs when identified early on in their

investment cycle. NIF has already proven usefulness over time, and E5P has started successfully especially through the active role taken by the fund manager EBRD. These facilities appear to work more efficiently on project level than the Climate Technology Fund (CTF), much of which has remained unused because of the rigid programming system. A more flexible window for quicker access could be added and also other risk sharing instruments more widely made available. 4. Channelling EU grants through national EE/RE facilities

The team considers that EU (and donor) support to the national EE/RE funds/facilities is still needed, despite some less promising experiences in the past. Lessons should be learned on the channelling the funds and managing the facilities in terms of better oversight, compliance, and control. Careful considerations should be given to the governance structure, making use of international financing experience, design of appropriate financing products and in transparent financing practices. Such grants and soft lending are desperately in need in the TC’s. Part of this financing should be made reimbursable. 5. Political risk sharing support for increased public borrowing by financial intermediaries for bankable EE European key IFI’s, especially EIB and KfW, are rapidly increasing lending volumes in TC’s, especially in Ukraine, in support of EE. Their financing terms with long maturities and relatively low interest rates will already now allow for financing through local intermediaries at rates acceptable to their clients and directly supporting municipalities in EE financing. However, the creditworthiness and borrowing capacity of the Governments will start to be the limiting factor towards further increasing public sector lending (“sovereign lending”) volumes, even if channelled through creditworthy public financial intermediaries. 6. More diverse choice of smaller grants or reimbursable financing There appears to be a gap in support of smaller EE and RE projects needing grant support especially at early stages of operations. E.g. NEFCO operations in Ukraine have demonstrated successful pilots having been implemented through soft loans. EU and donor grants channelled through an instrument would help extend such support, e.g. via existing facilities and financial intermediaries. The areas where such soft financing would additionally help include: (i) Development of EE solutions and helping mobilise retrofits in the multi-apartment residential sector; (ii) Development of private sector energy service industry, including ESCO’s and contractors; (iii) Development of decentralised RE solutions and applications (small scale hydro, biomass, solar and wind); (iv) Assistance to help establish energy input supply chains and markets, especially in biomass fuels; and (v) Risk sharing with commercially run investment funds, facilities and commercial banks serving SME’s.

3 INTRODUCTION Energy efficiency and renewable energy belong to the “standard jargon” of all development agencies and development financiers. Backed by their tax-payers and shareholders they have all turned “green” and have included these two areas among their top priorities. The international donor and financing community has been the cornerstone for getting promotion of energy efficiency and renewable energy on the roadmap also in the Eastern Neighbourhood countries. The transformation process has only begun, but major progress has already been made in all the three TC’s, especially in improving the “enabling environment” and getting first wave of investments financed. The EU integration process has been driving the EE and RE regimes and processes towards international standards. Energy sector has played a central role through macro level policy support combined with budget and financial support and technical assistance. EU has been clearly the most active and generous grant donor together with a handful of key bilateral partners enabling the most essential operating environments to be established in support of local energy agencies. The international public financing institutions (IFI’s) have taken their place as pioneers in getting initial and essential investments financed in the risky financial environments prevailing in the TC’s. Their existence and main role is to act as lenders/financiers of the “last resort”, i.e. through assuming larger political and/or commercial risks help finance operations which “mainstream” commercial financiers would not do by themselves. The general idea has been through joining the IFI’s via co-financing or taking up financing when markets have opened and risks are within their acceptable limits. This is why IFI’s play such a significant role as “ice-breakers” in opening EE/RE markets, bringing investment size financing volumes combined with grant advisory assistance and letting private sector take up their role down the line. The team would like to thank all the interviewees for the valuable and updated market and financing information that they kindly shared. In addition, special thanks go to the staff of the INOGATE Secretariat in Kiev as well as key experts in Tbilisi and Chisinau for their invaluable expertise, support, and assistance extended to the team. Any omissions or mistakes in this report are the sole responsibility of the writers and not those of the EU or INOGATE.

3.1 OBJECTIVES The EU supported and financed INOGATE energy programme is winding up in April 2016 after twenty years of technical assistance and advisory services in a large number of areas to the Eastern Neighbourhood countries. INOGATE’s support to the TC’s have been varying from drafting of secondary energy legislation, policies and regulations down to EE awareness creation and hands-on technical support to RE agencies and stakeholders. The EE and RE financing support community is nowadays very large and diverse, and has a number of active IFI’s, donors and dedicated regional and country oriented EE/RE financing facilities in place. In view of this, the EC requested INOGATE in 2015 to carry out a mapping study covering these three

EU accession countries, Ukraine, Georgia, and Moldova to identify the various financiers and financing instruments available to the TC’s. The study has in practice covered four main areas: 1. Mapping of financing supply; 2. Review of demand side; 3. Identification of bottlenecks and financing gaps; and 4. Drawing- up of conclusions and recommendations.

3.2 METHODOLOGY The Study was carried out during October 2015-March 2016 as follows: initial Desk study in October 2015, Field study in November 2015, Desk study December 2015-January 2016 and Report compilation January – mid March 2016.1 CHAPTER 4 below will set the frame for the review, i.e. tries to present the fundamental reasons why these type of investments take place and what drives the different user groups to go for such investment, or alternatively to refrain from them. CHAPTER 5 will paint the “big picture” of the international financing and donor community contributing to EE and RE investments and improvements in the three TC’s. It gives short summaries of the financing volumes, financing instruments and EE/RE priority areas, as well as financing channels. CHAPTERS 6 - 8 present the country specific information on Ukraine, Georgia, and Moldova being a key to understanding of the role of financing starts with a short presentation of the energy sector with specific reference to EE and RE regimes. Short introduction to the international financing flows to EE/RE and financing and TA instruments, as well as the local private and public financiers completes the local market picture.

1The desk review is based on publicly available information obtained via Internet web pages of the financing and promoting organisations, through relevant reports and through the interviews during the field visits. The team spent altogether seven work-days in Ukraine, five in Georgia and four in Moldova interviewing the key international and local financiers, donors, public EE/RE agencies and authorities, fund managers, as well as selected user groups representatives (e.g. Chambers of Commerce, municipalities, Home-Owners’ Associations, residential management companies). A wide selection of target audience was interviewed in order for the team to gain understanding of the EE/RE market, outlooks, as well as financing practices and gaps. Almost 60 interviews were held during the visits. The study area to be covered is wide and the overall resources and time allotted were limited. Therefore, this report is not an in-depth analysis of the EE/RE and financial markets of the TC’s, but aims at giving a snap-shot on what the operating and financing environment for EE/RE investments looks like at this point in time. It also maps the key players and financiers on this market in the TC’s including their priority areas and actual financing operations. The presentation is not an exhaustive recording of all activities, but through narrative means and key factual data tries to paint a picture where the countries are moving at this moment. The quick review and interviews have provided the basis for the conclusions and recommendations drawn up by the team.

4 DRIVERS FOR FINANCING ENERGY EFFICIENCY AND RENEWABLE ENERGY

Financing seldom creates demand. The starting point for any EE or RE investment or improvement is the decision-making situation and process at grass-root level at the user and borrower / beneficiary end. The factors affecting individual decision making can be called “drivers”. The “investor” has to weigh many factors when he/she makes the decision whether to move ahead with EE/RE activity or refrain from doing it. They differ among the various user groups and work as ultimate incentives to make that positive investment decision in the given point of time in a given operating environment. The most important drivers do not only relate to the availability and cost of financing, but are reflections of the operating environments, such as tariffs, taxation, policy, and cash incentives and economy and market considerations. Below a summary on some of the key drivers behind the “investors’” final say whether to go ahead with EE or RE action and investment. The transactions and financing flows are the end-result of this chain of drivers and the consequent investment decisions. The country sections of this report reveal many of these factors which help in understanding why or why not actual progress is being made in EE and RE fields. 4.1 ENERGY EFFICIENCY Energy Industry: A large part of the existing energy industry, generating plants, transmission and distribution systems, are originating in the old Soviet system in all three TCs. It is generally speaking outdated in terms of technology and insufficiently maintained due to lack of funds. Any meaningful EE improvements would mean major overhaul and large investments. Low tariff levels and low public budgets has meant in practice that investments have been covered by sovereign borrowing mainly from MDB’s. Thus, the main driver has been availability of concessional long-term loans for their refurbishment or replacement. Industry: Much of the larger industrial base is also outdated, energy-intensive, and energy- inefficient. The heavy process-industry (e.g. steel) and engineering industry, in Ukraine in particular, represents old energy-intensive technology making the entire industry internationally uncompetitive in the long run. Major reconstruction or replacement investments not only in EE but new technologies would be needed for survival. This would require considerable amounts of domestic investor risk capital from present owners and new investors. Thus the triggering factor is also the competitiveness and market outlook. SME’s: Small industry and service sectors can engage in EE improvements with lighter investments in the processes in e.g. heating, steaming, and lighting systems. The main drivers here are the profitability of the investment and the length of the pay-back time. The second interrelated driver is the cost and terms of borrowing. Improved energy-efficiency often is critical means of being competitive in the opening EU markets for the SME’s and helps them fulfil the required EU environmental standards. Households (HH): Individual home owners’ EE decisions are driven by various factors. In old apartments EE improvements are driven by increasing comfort level or their affordability. New construction normally includes energy-efficient heating and insulation solutions. Here the availability of subsidies for poorer HH’s and incentives for better-off HH’s combined with the availability of affordable (local currency) loans will swing the decisions either way. In residential multi-apartment buildings HH’s are rather reluctant for common area EE investments. The

availability of public grants and existence of organised and creditworthy HOA’s having access to affordable loans are the main drivers. Public authorities and agencies: The central Government, municipalities and EE/RE agencies, although locally sit on the supply side, are still users of taxpayers’ and international funds. The appearance and success of EE/RE activities are a reflection of the action and financing these stakeholders are engaging in. One important driver is the improved “enabling environment” for all players whether corporates or households. This is behind the decisions for concrete, policies action plans, and incentives. Clear rules of the game and sufficient incentives will very much guide what financing will be in place. The level of active promotion, support and concessional loan and grant financing of EE/RE through e.g. public funds and facilities can convey the positive impulses over to the user groups and act as a “macro-driver”. 4.2 RENEWABLE ENERGY Large scale RE: Larger private hydropower, wind or solar generation investments (dominant in TC’s) are driven by markets, financial viability, power purchase agreements, price and financing terms just like anywhere in the world. The TC’s have limited domestic investment capital and capital markets requiring IFI and international commercial financing, as well as strategic foreign investors. The existence of favourable investment climate both in foreign and local terms is a crucial driver for any single investment decision. The availability of equity and loan financing at acceptable terms will normally follow, if this condition is fulfilled. IFI financing can often swing the total financing package terms favourable to RE investments. Small-scale RE: Smaller RE investments, such as boiler conversions are often simultaneously also EE investments and are driven by the same factors. At the SME level, besides improving “the bottom line” the investments decisions can be driven by “sticks” i.e. environmental and technical standards and requirements or by “carrots” i.e. availability of incentives and competitive financing and price of alternative fuels. The households consider making use of RE solutions when subsidy levels and incentives will compensate the longer pay-back and cost of financing, i.e. helps to internalise the environmental benefits of such investments.

5 INTERNATIONAL DEVELOPMENT FINANCING INSTITUTIONS AND DONORS

5.1 INTRODUCTION The Multilateral Development Banks (MDB’s), bilateral development finance institutions (DFC’s) and donor supported financing facilities/funds (commonly called IFIs) have constituted the main source of EE and RE investment financing in support for EE/RE operations in the three TC’s. The IFI’s have brought along the necessary volumes of investment financing, which otherwise would not be available today from other sources. During the last five years more than EUR 5.9 bn of IFI investment financing has been extended to Ukraine, Georgia, and Moldova to finance EE/RE investments directly or via financial intermediaries. As shown in the graph, Ukraine has received almost three fourths of this financing, while Georgia and Moldova as smaller economies have received one fifth and five per cent respectively.

Figure 1: Financing approvals by MDB’s and key DFC’s to the TC’s to EE and RE purposes2

Total IFI financing by country, 2010-2015 - EUR 6 billion

0,4 b. 5,8%

1,3 b. Ukraine 22,4% Georgia Moldova

4,3 b. 71,7%

During the same period, approximately EUR 450 million of grants financing has been provided as EU budget support and TA as well as bilateral donor grants to the TC’s. The relative size of the grant volumes compared to investment loans is sizeable reflecting the importance of grant financing at this early stages of EE/RE transformation process in the TC’s. The grants have been intended to help the countries e.g. prepare enabling legislation, improve their regulatory regimes, blend grants to IFI loans, and finance local level EE and small RE piloting utilizing internationally proven best practices.3 The grants have also been blended with IFI investment loan and equity financing and provided the incentives and “softening” necessary to open up these new markets.

2This includes grants from E5P, CTF, GEF and bilateral donors attached to EBRD, IFC, World Bank and NEFCO loans. 3This includes EUR 60 million of NIF financing through IFI’s.

Figure 2: EU and bilateral financing in the TC’s 2010 – 2015

EU and bilateral financing, 2010-2015 - EUR 448 million

120,4 m. 26,9% Ukraine Georgia Moldova 48,5 m. 279,0 m. 10,8% 62,3%

This report will clearly demonstrate below that this financial and technical support has been instrumental for the process to start in the TCs. However, many major obstacles still remain before any large scale transformation can start taking place. After a short general overview of main financiers given in this chapter, the specific financing operations in each TC are being elaborated in the subsequent main country chapters 6-8. In order to give “both sides of the coin” the financing supply is being reflected in those chapters against the prevailing demand situation, prospects, as well as the main bottlenecks among the main user groups.

5.2 THE INTERNATIONAL FINANCIERS The following Graph paints a simplified “big picture” on the financing partners active in EE and RE support in the TC’s. All the four levels of financiers, intermediaries and beneficiaries all play an important role in the chains of channelling investment and grant financing to EE and RE. Funds from the donor level I flow through a number of channels and institutions and are mixed with various financing instruments, until financing reaches its final users and beneficiaries. The number of financing institutions and agencies is very large and reflects the high priority for EE and RE sectors among the international community. There exists a wide choice of channels, instruments, and financing partners which is always positive from the TCs’ point of view. On the other hand, the potential users may get “lost” in the jungle of the plethora of financiers, at least seen from a top-down perspective. Looking from the user’s

perspective, the channels are much simpler and the first contacts via the “house bank” or EE/RE agency will be able to provide the financing service or direct forward to possible alternatives. Figure 3: Key financing partners to Ukraine, Georgia and Moldova in RE and EE

LEVEL I - DONORS EUROPEAN UNION BILATERAL DONORS

LEVEL II - GLOBAL & REGIONAL FUNDS &FACILITIES NIF E5P GGF CIF/CTF GEF OTHER FUNDS

LEVEL III - IFIs EBRD EIB WB IFC NEFCO BSTDB ADB KfW DFC’s

LEVEL IV – LOCAL FACILITIES & INTERMEDIARIES GEORGIA MOLDOVA UKRAINE

ENERGOCREDIT BANKS GOVT MOREEFF MOSEFF BANKS GOVT USELF UKEEP BANKS GOVT

LEVEL V - CLIENTS

MUNICIPALITIES DH COMPANIES INDUSTRY, ESCO DEVELOPERS HOUSEHOLDS INVESTORS

5.2.1 Donors EUROPEAN UNION (EU) Figure 4: Total EU support to TC’s, 2010 – 2015

Total EU support, 2010-2015 EUR 389.4 million

EU Budget Support

EU Technical 37% 44% Assistance NIF

15% 4% E5P

INSTRUMENTS: Budget support, grants and guarantees through facilities, investment, and TA grants. AREAS: EU has been by far the most important grant donor to the TC’s also in these sectors, covering more than 60 per cent of the total grant volumes. The grant support towards EE/RE development in the TC’s has been provided through three main channels: 1. Budget Support. The EU grants have supported the Governments’ EE and RE reform process, supported the national EE/RE Agencies and provided seed money for national EE/RE Funds in Ukraine and Moldova. 2. Investment grants through NIF. The Neighbourhood Investment Facility is one of the instruments for EU to blend its grants with IFI investment financing to catalyse larger amount of financing. Over time NIF has been able to leverage 9 times such financing. A smaller portion is also channelled to TA activities. 3. Direct technical assistance has helped the TC’s in preparation of secondary legislation, in regulatory advisory and municipal sector work carried under the Covenant of Mayors partnerships. In addition, EU supports a number of regional facilities supporting indirectly EE/RE work in the TC’s and finances them e.g. through the NIF (see below).

BILATERAL DONORS INSTRUMENTS: Investment and TA grants, guarantees. AREAS: The developed country governments and tax payers are the ultimate source of all financing. First, as shareholders they provide the capital as well as concessional funds for the MDB’s and DFC’s and finance TA programs through voluntary Trust Funds and dedicated Facilities. Secondly, they participate with equity and grant financing into global and regional funds specialised in financing EE/RE investments directly or through IFI’s. Thirdly, they have bilateral country TA programmes supporting EE/RE legislative, regulatory and pilot project work through Governments, agencies, municipalities, NGO’s and the private sector.

Fourthly, they can engage direct financing of pilot projects at the grass-root level. ACTIVE DONORS: RE and EE belong to the highest priorities among most donors, so practically all of them support the activities at least indirectly through “wholesale” channels. The three most active (not necessarily the largest) Western donors in EE/RE in the TC’s are:

• United States (USAID) has ongoing bilateral programs in all the three countries. It finances TA on e.g. municipal energy reforms and improvements, EE Action Plan support, local level RE development and provides partial risk guarantees for SME’s.

• Sweden (Sida) besides being a strong supporter of the multilateral institutions also supports the sector especially through TA reinforcing the local financial systems and governance and facilitating EE financing.

• Germany (GIZ) finances municipal sector EE development especially in support of the work with the Covenant of Mayors. The German-Ukrainian Fund is among the key doors supporting local EE/RE grant financing development.

5.2.2 Dedicated EE/RE Related Funds Facilities

NEIGHBOURHOOD INVESTMENT FACILITY (NIF)

Table 1: NIF support in the Eastern Neighbourhood countries, 2008 - 2014 Total in the Eastern Total in the Eastern Total in energy sector of Number of Neighbourhood countries Neighbourhood countries in 3 countries (Georgia, projects in 3 energy sector Moldova and Ukraine) countries EUR m. EUR m. EUR m. 463 .2 121.1 59.4 10

Figure 5: NIF support in RE and EE financing in TCs, 2008 – 2014

NIF support in EE/RE financing, 2008-2014 - EUR 59.4 million

31% 33% Ukraine Georgia Moldova

36%

INSTRUMENTS: Investment and TA grants, risk participation, and guarantees. AREAS: NIF is a financing instrument of the EU designed to support the European Neighbourhood Policy towards the Eastern and Southern Neighbours and EU accession countries. Improvement of EE, promotion of RE and strengthening of energy security are among the NIF key objectives. Its TA and investment grants as well as risk participation/ guarantees aim at maximising the financing towards infrastructure and private sector, especially SME development. It has managed in the Eastern Neighbourhood to help mobilise more than EUR 10 billion of investment financing through its grants and guarantees, i.e. at a leverage-factor of more than 20:1. The eligible European MDB’s and DFC’s, mainly EBRD, EIB and KfW, have been financing e.g. hydropower rehabilitation and power transmission upgrading in Ukraine and Georgia and the EBRD Sustainable Energy Financing Facilities (SEFF’s) in Moldova. NIF has also indirectly supported EE/RE in the TC’s through regional facilities (EUR 159 m.), such as E5P, Green for Growth Fund, Caucasus Sustainable Energy Finance Facility and Municipal Project Support Facility. NIF is managed by EIB in partnership with the host Governments.

EASTERN EUROPE ENERGY EFFICIENCY AND ENVIRONMENT PARTNERSHIP (E5P)

Table 2: E5P contributions for TC’s Total contributions Own country contributions Total contributions paid in pledged/approved pledged/approved EUR m. EUR m. EUR m. 153.6 12.0 120.5

INSTRUMENTS: Investment and TA grants. AREAS: The E5P Fund is a EUR 168 million multi-donor grant fund originated from an initiative by the Swedish Government. The fund managed by EBRD merges financial contributions from EU and the participating bilateral donors provides grants to complement EE loans provided by finance institutions, including EBRD, EIB, NIB/NEFCO and the World Bank Group for municipal sector projects.

Ukraine has since 2009 benefited the most from E5P with EUR 93 million of approved pledges. The co-financed projects through EBRD and NEFCO include e.g. modernisation of district heating networks, upgrading water and wastewater systems and technical assistance for regulatory reform. Activities in Georgia and Moldova are just starting since the E5P formally extended its activities to them in 2014.

CLEAN TECHNOLOGY FUND (CTF)

Table 3: CTF approved funding for Ukraine CTF approved Approved funding Approved funding Expected co- Number of funding for Energy Efficiency for Renewable financing by IBRD, projects US$ m. US$ m. Energy4 EBRD, IFC US$ m. US$ m. 548.8 249.3 132.6 1,890.6 18

INSTRUMENTS: Concessional long-term loans, guarantees and other risk sharing instruments, TA grants. AREAS: The Clean Technology Fund (CTF) is one of four investment programs of the USD 8.3 billion global Climate Investment Funds (CIF) implemented by the European Bank for Reconstruction and Development, the Asian Development Bank, the African Development Bank, the Inter-American Development Bank, and the World Bank Group. The US$ 5.3 bn. CTF provides financing to middle- income countries to scale up demonstrating, deploying, and diffusing low-carbon technologies in renewable energy, energy efficiency, and sustainable transport to achieve long-term reduction of greenhouse gas emissions. To date, USD 3.4 billion (over 60 per cent of CTF funding) is approved for 71 projects under implementation globally, of which 70 per cent is directed towards EE and RE investments. CTF financing is expected to leverage almost ten times as much co-financing from MDB’s and private sector financiers. Currently CTF has a financing portfolio only in Ukraine among TC’s. EBRD is utilizing CTF co-financing to e.g. district heating EE improvements and wind farm investment. CTF also supports the World Bank lending e.g. district heating and urban infrastructure EE and IFC programs in RE direct lending and its EE financing program in Ukraine.

4 Renewable energy excludes wind power.

GLOBAL ENVIRONMENT FACILITY (GEF) Table 4: GEF funding approved for TC’s, 2010-2015 GEF Total grants Co-financing Approved in EE/RE sectors. - approved -US$ b. Mobilised- US$ b. TC’s -US$ m. US$ m. 14.5 75.4 34.0 18.0

INSTRUMENTS: Investment grants and TA grants. AREAS: The Global Environment Facility (GEF) was established in connection with the 1992 Rio Earth Summit, to help alleviate global environmental problems and finance climate change and biodiversity related improvements and investments. The GEF has become an international partnership of 183 countries, international institutions, civil society organizations, and private sector to address global environmental issues. GEF works through a number of global trust funds provided by the GEF 39 donor countries replenished every four years. The GEF’s 18 implementing partners are the Multilateral Development Banks and funds, a number of UN specialised agencies and larger international environmental NGO’s. GEF grants are administered by the banks and agencies and often blended with their own loans and grants. So far GEF has co-financed three operations in Ukraine on EE in public buildings, technology transfer and energy management through EBRD, UNDP, and UNIDO. GREEN FOR GROWTH FUND (GGF) INSTRUMENTS: Equity, credit lines, risk sharing, grants TA. AREAS: The Green for Growth Fund (Southeast Europe) is the first specialized private investment fund to advance energy efficiency (EE) and renewable energy (RE) in the European Eastern Neighbourhood region and Turkey. Initiated by the European Investment Bank and KfW Development Bank, GGF is an innovative public-private partnership established to reduce energy consumption and CO2 emissions. GGF provides refinancing to Financial Institutions to enhance their participation in the EE and RE sectors and also makes direct investments in Non-Financial Institutions with projects in these areas. The activities of GGF are supported by a donor-funded Technical Assistance Facility. The Fund is a newcomer in the TC’s. GGF investment portfolio in June 2015 to Southeast Europe and European Neighbourhood Regions was EUR 246.5 million, with the share of Georgia of 6%, Ukraine 2% and having no investments yet in Moldova. OTHER FUNDS There are several other global and regional private investment funds and grant facilities also available for the TC’s, but are still less actively involved there in E/RE financing and not elaborated here. Such private equity funds include Small Enterprise Assistance Funds (SEAF), which e.g. has under its umbrella the Caucasus Growth Fund (see also chapter 7.). A new major global multi-donor facility, the Green Climate Fund (GCF), is just starting to finance its first operations through IFI’s and UN agencies, and will be on its part in complementing the low-carbon concessional financing needs also in the TC’s.

5.2.3 Multilateral Development Banks (MDB’s)5

EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT (EBRD)

Table 5: EBRD financing for 3 countries, 2010-2015 Total financing in TC’s EE/RE (2010-15) EUR b. (No.) EUR b. (No) 14.7 (650) 1.4 (31)

Figure 6: EBRD EE/RE Financing approvals in TC’s 2010-15

EBRD financing in EE/RE sectors, 2010-2015 - EUR 1.4 billion

13% Ukraine Georgia 25% Moldova 62%

INSTRUMENTS: Public and private sector loans, EE/RE and SME credit lines, equity, subordinated financing, blended investment and TA grants from financing partners. AREAS: EBRD, formerly called “Transition Bank”, has been the most proactive MDB in the region in support of EE/RE investments. Through its unique versatile structure of being able to finance both private sector investments directly and through financial intermediaries and to lend to the public sector entities, Governments, municipalities and public companies makes EBRD stand out from the others. It is also successfully blending its commercially priced lending with concessional loans and grants to bring to clients more affordable financing terms. It also provides grant technical assistance and advisory services in connection with its financing operations. EBRD has since 2008 developed a “signature” financing product and framework, Sustainable Resources Financing Initiative6 which combines (i) sector technical support in improving the “enabling environment, (ii) investment loans channelled as credit lines through participating local

5 The Council of Europe Development Bank (CEB) has a mandate to also finance e.g. EE as well as social housing projects. One sovereign loan to Georgia has been approved, but has not been utilised. Although potential may exist for more financing in the future, CEB activities are not covered in this report. 6 Initially called Sustainable Energy Initiative, but nowadays also covers other infrastructure services, such as water supply and sanitation.

banks, (iii) grant and/or concessional loan component, and (iv) advisory TA services. EBRD has launched a series of SEFFs and loan operations in all three TC’s, one SEFF for the SME sector and one for the residential clients, as well as additionally a direct RE lending facility in Ukraine, as clients are dependent on reasonably priced loans for EE improvements, RE conversions etc. This financing instrument has already proven effective and helped open these markets in the currently difficult financing environment.

EBRD has also been lending extensively to upgrade and improve EE of the Ukraine’s public district heating companies, to revamping gas and electricity transmission systems and to building new hydropower capacity in Georgia and in establishing RE private power generation capacity from biomass/biogas, to name a few areas. The numerous SME credit lines through local banks outside the SEFF program are also available for EE and small scale RE.

EUROPEAN INVESTMENT BANK (EIB)

Table 6: EIB financing in Energy sector, 2010-2015 Total in Eastern Europe, Total in Eastern Europe, Total in energy sector Number of Southern Caucasus and Southern Caucasus and of 3 countries (Georgia, projects in Russia region Russia in energy sector Moldova and Ukraine) energy sector EUR b. EUR b. EUR b. of 3 countries 6.8 1.5 1.1 12

Figure 7: EIB EE/RE financing in TC’s 2010-2015 EIB financing in EE/RE sectors, 2010-2015 - EUR 2.4 billion

3% 11% Ukraine Georgia Moldova

86%

INSTRUMENTS: Public and private sector direct loans, EE/RE, SME credit lines, blended grants from financing partners. AREAS: EIB as Europe’s “house” investment bank has also been mandated to support the Neighbourhood Policy and is rapidly increasing its exposure in the three TC’s. EIB can bring along the much needed financing volumes to fill the big gap in Energy efficiency. EIB can expand its exposure

in the TC’s at its own risk beyond EU guaranteed lending limits under the special Neighbourhood mandate. Consequently, EIB lending in the region, including Ukraine and Georgia, is growing fast. Its funding structure and access to Government guarantees makes its long term lending attractive compared to other sources.

It has been financing energy infrastructure investments in the TC’s including gas and power transmission and hydropower rehabilitation. Second traditional financing targets have been the SME’s and mid-caps being channelled through credit lines through local commercial banks. Most recently, EIB has moved also to finance state and municipal level EE improvements, including universities, schools, and kindergartens.

THE WORLD BANK GROUP THE WORLD BANK (IBRD) Table 7: World Bank Group financing in RE and EE projects, 2010 - 2015

EE and RE projects in EE and RE projects in EE and RE projects in Total for EE and RE Ukraine Georgia Moldova projects in 3 countries EUR m. EUR m. EUR m. EUR b. 982 365 34 1.4

INSTRUMENTS: Public sector loans, TA and advisory services financed from donor Trust Funds. AREAS: The World Bank (IBRD), the public sector window of the Group, has been assisting the central Governments on the energy sector policy, sector reform as well as legislative and regulatory levels. Its long term concessional lending has supported directly EE improvements through e.g. restructuring the district heating systems and companies and upgrading power transmission systems. The Bank hast also provided funds and advice to central and municipal agencies in developing the social safety net to ensure energy services to the poorest and supporting regional development and energy-efficient public infrastructure. In Ukraine, World Bank financed energy efficiency improvements in district heating sector, as well as in industrial and municipal sector via loans channelled through local banks. It also supports rehabilitation of the power transmission network which will improve its efficiency and reliability. The Bank also provides support to the RE sector by rehabilitating hydropower plants in partnership with EBRD and EIB. In Georgia, World Bank has not been very active in the energy sector since there was no request for EE financing by the Government. Support was provided in the power sector for strengthening of the transmission grid together with ADB and EBRD which would support growing exports of hydropower to Turkey in the near future. World Bank activities in Moldova focused on district heating sector with the project of improving operational efficiency and financial viability of Newco DH utility, and heat supply in Chisinau.

INTERNATIONAL FINANCE CORPORATION (IFC)

Table 8: IFC financing in TCs Ukraine Georgia Moldova Total portfolio for 2015 Cumulative financing Cumulative financing Total portfolio for 2015 US$ m. US$ b. (No.) US$ b. (No.) US$ m. 823 3.2 (90) 1.2 (55) 83.5 INSTRUMENTS: Private sector direct loans, equity and guarantees, credit lines, risk sharing instruments, grant, and reimbursable TA and advisory services.

AREAS: IFC, the private sector window of the Group, has agribusiness on a high priority agenda in all TC’s financing especially export oriented companies through direct investments (equity, loans) or through financial intermediaries (loans, trade finance). Financial sector development has been another traditional area for IFC. IFC work in Ukraine in EE sector focused on TA and advisory services which included development of residential sector EE financing together with the World Bank under two donor supported advisory projects, The Residential Energy Efficiency Project and The Ukraine Sustainable Energy Finance Project (USEFP) There were no direct financing for RE investments in Ukraine by IFC, and currently no such investment in lending pipeline. Renewable energy development has been among the principal areas of financing for IFC in Georgia through direct equity and loans to medium and large private hydropower investments. IFC also supported the financial sector by approving SME credit lines to local banks. However, it has not seen sufficient demand in the country for dedicated EE lines of credit. IFC in Moldova is active in district heating sector by supporting the World Bank new work focusing on private households and enterprises.

BLACK SEA TRADE AND DEVELOPMENT BANK (BSTDB)

Table 9: BSTDB financing in RE and EE projects, 2010 - 2015 EE and RE projects in EE and RE projects in EE and RE projects in Total for EE and RE Ukraine Georgia Moldova projects in 3 countries US$ m. US$ m. US$ m. US$ m. 30 97 75 202

INSTRUMENTS: Private and public sector project loans, credit lines, equity, grant TA. AREAS: The Black Sea Trade and Development Bank (BSTDB) is an international financial institution, headquartered in Thessaloniki, Greece established by Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldova, Romania, Russia, Turkey and Ukraine which started with operations in 1999. The Bank has regional focus and supports trade and project finance lending, guarantees, and equity participation in private enterprises and public entities in its member countries in the Black Sea region. Its cumulative portfolio at the end of 2014 included 304approved operations amounting to EUR 3.5 billion. In Ukraine BSTDB lending related to energy efficiency is limited to three general SME credit lines launched to ProCredit Bank. In Georgia BSTDB has channelled almost all its financing through

financial intermediaries, commercial banks and microfinance organisations. During the last five years it has approved 11 investments for micro-and SME (MSME) purposes, EE and RE included. BSTDB focused in Moldova like in Georgia almost entirely on the financial institutions sector. EE and RE investments have not been targeted separately, but have been generally included as eligible financing targets.

ASIAN DEVELOPMENT BANK (ADB)

Total EE/RE financing in TC’s (Georgia): EUR 150.0 million

INSTRUMENTS: Public and private sector loans, equity, guarantees, grant TA. AREAS: Asian Development Bank is a multilateral financial institution established in 1966 to foster economic growth and cooperation in the Asia and Pacific region. However, over time its membership increased to include other members, and currently 19 out of 67 members come from outside the region. Georgia is the only TC member and financing target. The Bank provides loans, technical assistance and grants to its clients, member governments, and direct assistance to private enterprises though equity investments and loans. Promoting EE and RE is one of the three pillars of the 2009 ADB Energy Policy, other two being maximizing access to energy for all, and promoting energy sector reform, capacity building, and governance. ADB’s energy sector financing has focused in Georgia on transmission system upgrading and greenfield investments. It has co-financed the Adjaristsqali Hydropower Project (Shuakhevi HPP) together with EBRD and IFC. The Bank has also supported financial sector through SME credit lines to commercial banks. 5.2.4 Bilateral Development Finance Companies

KREDITANSTANSTALT FUR WIEDERAUFBAU (KFW)

Figure 8: KfW financing in EE/RE sectors in TCs, 2010 – 2015

KfW financing in EE/RE sectors, 2010-2015 - EUR 542 million

7% Ukraine Georgia 39% 54% Moldova

INSTRUMENTS: Concessional public sector loans, equity, guarantees, investment and TA grants. AREAS: KfW, a group of German DFC’s, finances and supports programmes and projects mainly in public sector on behalf of the German Federal Government, and primarily the Federal Ministry for Economic Cooperation and Development (BMZ). KfW has been among the leading IFIs in energy sector in the TC’s over a long period of time through direct loans to energy and municipal infrastructure and credit lines through local commercial banks. It has also been pioneer in establishing as investor local microfinance and SME banks also active in EE financing in the TC’s. KfW has been active in Ukraine’s energy sector especially in modernisation of power distribution system, in strengthening the municipal sector agencies in e.g. small-scale infrastructure and in financing EE investments of the corporate sector, especially SME’s through local banks. As co- founder of the German-Ukrainian Fund (GUF) for providing loans to SMEs, KfW is prepared to channel seed- financing to the proposed national EE Fund. EE investments financed by KfW in Georgia include industrial EE serviced through credit lines, and EE retrofits in public buildings, investments in efficient electricity generation, transmission and distribution as well as the promotion of renewable energy, including small/medium sized hydropower projects. In Moldova KfW has financed e.g. the Moldova Social and Investment Fund (MSIF) which implements small-scale infrastructure EE upgrades in small and medium-sized municipalities, as well as launched SME credit lines through commercial banks. OTHER BILATERAL DEVELOPMENT FINANCE COMPANIES Together with KfW the European bilateral DFC’s co-operate under the European Development Finance Institutions (EDFI) umbrella co-investing and financing also EE/RE investments and sharing overall risks through joint investments. The fifteen members have a total portfolio of over EUR 32 billion in over 4,000 private sector investments in emerging countries. One tenth of this has gone to Eastern Europe, one third of the volumes to infrastructure and one third to financial sectors. The members have through the joint Interact Climate Change Facility committed more than EUR 260 million to new RE investments. A number of EDFI members have also by themselves financed EE/RE investments directly in the TC’s. Their main financing channels are credit lines with local banks as well co-financing with MDB’s, as they are not locally represented. Netherlands Development Finance Company (FMO), has been active in all three countries mainly having provided equity and credit lines with intermediaries and through co-financing with MDB’s. In Ukraine it mainly participated in co-financing the EE/RE sector through EBRD and Green for Growth Fund and into microfinance through the Global Climate Partnership Fund. In Georgia FMO has co-financed one hydropower investment and made equity investment in SEAF and provided sub-ordinated loan to commercial bank for SME lending. In Moldova, FMO has one SME operational credit line a number of commercial banks. The French private sector DFC and AFD subsidiary Proparco is active only in Ukraine where it signed a loan agreement with the BSTDB for financing private sector projects in various sectors including RE. Several other DFC’s are active in Georgia and have made investments mainly through financial intermediaries. The Swedish SWEDFUND has made a general purpose SME loan facility to TBC bank. OeDB, the Austrian Development Bank, has provided two dedicated EE credit lines through a commercial bank. DEG, the private sector DFC under the KfW Group, has with a Georgian commercial bank an on-going EUR 25 million SME credit line, which is also open to RE and EE on- lending.

5.3 LOCAL FINANCIERS 5.3.1 Commercial Banks The commercial banks play a crucial role in financial intermediation of international financing directed towards EE/RE investments and activities. On one hand, the MDB’s and DFC’s need a retail channel to reach its clients when direct lending to them is not viable. The financial sectors are not well developed or “deep” in the TC’s and the banks constitute virtually the entire local EE financing volumes, whereas other types of financing (e.g. leasing) are not developed. On the other hand, the commercial banks need international funding to enable medium and long-term lending.

The healthiest state and private commercial banks have an ample supply of credit lines from MDB’s and DFC’s. Many of the leading private banks have foreign bank strategic ownership by mainly European and have been recapitalised by their partners. The Russian owned banks have been either sanctioned or are winding down in many cases, especially in Ukraine. The private banks service in EE/RE mainly corporate and SME clients, whereas state banks can also cater for the municipal sector clients. The success of the intermediation depends on the funding arrangements and terms and in general has not been very good in the TC’s. The main reason has been the weak local currencies making the borrowing for final clients too expensive and/or short term. Thus financing for EE/RE purposes is not attractive in the current circumstances, and the market does not move well. The local banking sectors and the banks are elaborated in the country chapters 6 - 8. 5.3.2 Local Investment Funds

Public or privately owned EE/RE oriented investment funds are in place only in Georgia catering for co-financing of major infrastructure investments together with foreign and local investors and financiers. JSC Partnership Fund is a state majority-owned US$ 1 billion investment fund established in 2011 with two-fold role: (i) to consolidate the ownership of the largest Georgian state owned enterprises operating in transportation, energy and infrastructure sectors; and (ii) to promote investment in Georgia by providing pivotal co-financing (e.g. equity, mezzanine financing etc.) to infrastructure projects at their initial stage of development. It has been also instrumental in mobilising IFI participation in the two new major hydropower investments through its own financial commitment and risk sharing. The Georgian Co-Investment Fund (“GCF”) is a US$ 6 billion private investment fund established in 2013 to provide its private investors with access to opportunities in Georgia’s fastest growing industries and sectors including energy sector projects. GCF has already co-financed two large hydropower investments and committed financing to a new proposed HPP. 5.3.3 Public Financing The new EE and RE Policies, the availability of major EU budget support and donor grant funds in the wake of the EU integration and lack of domestic concessional financing to EE/RE has given rise to setting up of dedicated national funds. The Energy Efficiency Fund has already been operating in Moldova since 2012. Lack of funding and governance issues have brought its operation to a halt and it is being currently restructured. The State EE Agency is currently in the process of setting up an EE Fund in Ukraine with support from the budget as well as key development partners. The funds

will complement the available financing with concessional terms (soft loans and grants) helping to reach out to client groups and activities currently left outside financing for these purposes. The relatively high level of poverty and harsh climate has necessitated TC Governments to provide social safety net to those affected by raising energy tariffs via direct subsidies financed from central and municipal budgets. Poor households can receive from 40% up to 100% reimbursement from their heating and electricity bills, if qualified and registered at the social service, the amounts varying between TC’s and dependent of affordability. More information can be found in Chapters 6 - 8 below.

6 UKRAINE

6.1 ECONOMY

“Poor macroeconomic situation, bank consolidation, weak currency, and East- Ukraine conflict are stalling the market”

Ukraine has been experiencing a severe economic crisis since early 2014adversely affecting all aspects of life including EE and RE activities. The severity of the situation can be described through e.g. the following recent indicators:7 • GDP fell by 6.8 per cent in 2014 and by 17.2 per cent and 14.6 per cent year-on-year in the first and second quarters of 2015; • Inflation stood at 51.9 per cent year-on-year in September 2015; • Industrial activity contracted 20.5 per cent year-on-year; • The hryvnia lost approximately 63 per cent of its value against the US dollar from January 2014 to mid-October 2015; The poverty rate is expected to double to 10.2 per cent in 2015 and would remain above its 2014 levels.

As a result of the poor macroeconomic situation and recent developments in Ukraine, both the demand (i.e. “the pull factor”) and supply (“the push factor”) parameters have been unfavourable towards major EE and RE investments.

6.2 ENERGY SECTOR

“Ukraine is not only among the most energy intensive, but also one of the most energy inefficient countries in the region.”

According to the World Bank Ukraine uses around 3.2 times more energy per unit of GDP than the average among OECD countries. In 2013, energy intensity of Ukraine amounted to 0.2 toe/th. 2005 USD PPP, where the OECD average amounted to 0.09 toe/th.2005 USD PPP8. The main reasons behind this include the high concentration of energy-intensive sectors, inefficient industrial processes and old equipment, inefficient district heating systems, and poor quality building stock. Energy supply in Ukraine is characterized by the dominance of fossil fuels and the high dependence on imports, especially gas. The graph below illustrates the energy balance of Ukraine in 2013.

7 Sources: The World Bank & EBRD Country Assessments, 2015. 8 Energy intensity is calculated as TFC/GDP (toe per thousand 2005 USD PPP) given in the Energy Charter Secretariat (2015) “In-Depth Review of the Energy Efficiency Policy of Moldova”.