MINISTRY OF ECONOMICS OF THE REPUBLIC OF LATVIA Financial accessibility for energy efficiency improvement in multi-apartment buildings Ex ante assessment European Union investment funds for the programming period 2014 - 2020 26 February 2015 Financial accessibility for energy efficiency improvement in multi-apartment buildings Ex ante assessment 19.02.2015 Table of Contents List of Tables ............................................................................................................................................5 List of Pictures .........................................................................................................................................7 Abbreviations and definitions ..................................................................................................................8 Summary ................................................................................................................................................11 1. Introduction ....................................................................................................................................16 1.1. Legal framework of Ex ante Assessment .................................................................. 16 1.2. Goal and scope of Ex ante Assessment ..................................................................... 17 1.3. Ex ante Assessment structure .................................................................................... 17 1.4. Ex ante Assessment updating .................................................................................... 19 2. Background ....................................................................................................................................20 2.1. Peculiarities of Latvian multi-apartment buildings and their energy efficiency .......... 20 2.1.1. Technical and energy efficiency characteristics of the residential resources pool 20 2.1.2. Possession status and ownership aspects of residential resources pool ............. 24 2.2. Targets of Latvia in the field of energy efficiency ..................................................... 30 2.3. Former and current energy efficiency support instruments ........................................ 32 2.3.1. European Union funds .................................................................................... 33 2.3.2. Climate Change Financial Instrument ............................................................. 34 2.3.3. European territorial cooperation and EU level programmes............................. 36 2.3.4. European Economic Area and Norwegian Financial instrument ...................... 38 2.3.5. Municipal budget funding ............................................................................... 39 3. Current experience analysis ...........................................................................................................41 3.1. Experience in the 2007 – 2013 European Union programming period ....................... 41 3.2. Positive and negative experience from lessons learned .............................................. 45 3.3. Other countries experience analysis .......................................................................... 47 3.3.1. Lithuanian experience ..................................................................................... 47 3.3.2. Estonian experience ........................................................................................ 49 3.3.3. German experience ......................................................................................... 52 3.4. Application of lessons learned in developing the multi-apartment building energy efficiency increase financial instrument ............................................................................ 52 4. Assessment of market failures ........................................................................................................54 4.1. Market failures assessment methodology .................................................................. 54 4.2. Analysis of energy efficiency increase measures and demand for financial resources 56 4.2.1. Assessment of the overall financial needs of multi-apartment buildings sector 56 MINISTRY OF ECONOMICS OF THE REPUBLIC OF LATVIA Page 2/114 Financial accessibility for energy efficiency improvement in multi-apartment buildings Ex ante assessment 19.02.2015 4.2.2. The return on investment of multi-apartment building energy efficiency increase projects ........................................................................................................... 57 4.2.3. Economic return of multi-apartment building energy efficiency increase projects 60 4.2.4. Analysis of households affordability ............................................................... 61 4.2.5. Private funding of multi-apartment building owners........................................ 63 4.2.6. Financial demand affecting factors .................................................................. 66 4.2.7. Funding demand estimate ............................................................................... 67 4.3. Analysis of the supply of energy efficiency increase measures and financial resources .......................................................................................................................... 70 4.3.1. Financial products of Latvian credit institutions .............................................. 70 4.3.2. Municipal funding .......................................................................................... 71 4.3.3. Financial products of international financial institutions.................................. 72 4.3.4. Green public investment ................................................................................. 73 4.3.5. Financial products of investment funds ........................................................... 74 4.3.6. Services of energy services providers .............................................................. 74 4.3.7. Analysis of factors affecting availability and price of financial resources ........ 79 4.3.8. Analysis of construction industry .................................................................... 85 4.4. Analysis of market failures ....................................................................................... 89 4.4.1. Suboptimal investment situations .................................................................... 89 4.4.2. Information asymmetry and scarcity ............................................................... 89 4.4.3. Scope of projects and transaction costs ........................................................... 90 4.4.4. Lack of capacity and experience ..................................................................... 90 4.4.5. Structural market failures ................................................................................ 90 4.5. Calculation of financial deficit .................................................................................. 90 5. Additional public and private resources to be raised by financial instrument................................92 5.1. Financing from international financial institutions .................................................... 92 5.2. Municipal financing .................................................................................................. 92 5.3. CCFI financing ......................................................................................................... 92 5.4. ERDF financing ........................................................................................................ 93 6. Investment strategy of financial instrument ...................................................................................94 6.1. Analysis of financial instrument alternatives ............................................................. 94 6.2. Choice of optimum alternative financial instrument .................................................. 98 6.3. Description of solution proposed by financial instrument ........................................ 101 6.3.1. Final recipients of aid and authorised entities ................................................ 102 MINISTRY OF ECONOMICS OF THE REPUBLIC OF LATVIA Page 3/114 Financial accessibility for energy efficiency improvement in multi-apartment buildings Ex ante assessment 19.02.2015 6.3.2. DFI guaranties to the borrower for receipt of loan from commercial bank for energy efficiency increasing measures of multi-apartment buildings ...................... 102 6.3.3. DFI direct loans ............................................................................................ 103 6.3.4. Grants ........................................................................................................... 105 6.3.5. Competence centre........................................................................................ 106 6.3.6. Additional resources raised ........................................................................... 106 6.4. Alternatives to energy efficiency increasing projects supported by financial instrument ...................................................................................................................... 107 7. Added value of financial instrument ............................................................................................109 7.1. Significance of financial instrument for shift towards low-carbon economy ............ 109 7.2. Consistency of financial instrument with other forms of public intervention