FINANCING HOUSEHOLD CLEAN ENERGY SOLUTIONS A Climate and Clean Air Coalition funded study produced in collaboration between the Frankfurt school UNEP Collaborating centre and UN Environment Finance Initiative Ulaanbaatar, Mongolia June 2018 CONTENT Executive Summary ........................................................................................................................................... i 1. Introduction ...................................................................................................................................................1 2. Key considerations ...................................................................................................................................... 2 2.1. Air pollution drivers .........................................................................................................................2 2.2. Impacts of air pollution....................................................................................................................4 2.3. Policy ....................................................................................................................................................4 2.4. Material considerations in assessment of a technology-based solution ...............................8 2.5. Previous interventions ...................................................................................................................14 3. Lower polluting heating alternatives for households in the ger districts .....................................16 3.1. Overview of air heating systems .................................................................................................17 3.2. Hydronic heating systems ............................................................................................................. 21 4. Selecting an efficient heating system ....................................................................................................24 4.1. Other innovative household energy solutions .........................................................................28 5. Improving building envelopes in ger districts ...................................................................................... 31 5.1. Baseline scenario .............................................................................................................................31 5.2. Recommended building envelope ...............................................................................................34 5.3. Costs..................................................................................................................................................36 6. Emission reduction and estimated energy savings ............................................................................ 37 6.1. The potential for air pollution reduction ..................................................................................37 6.2. Emission reductions potential ......................................................................................................38 7. Financial analysis ........................................................................................................................................46 8. Establishing a household energy finance facility ................................................................................. 51 8.1. Installation target ............................................................................................................................51 8.2. Governance structure of the facility ..........................................................................................52 9. Conclusions .................................................................................................................................................54 Annex 1: The National Program for Reducing Air and Environmental Pollution .............................56 Annex 2: List of suppliers ...............................................................................................................................59 Annex 3: Financial analysis ............................................................................................................................. 61 ABBREVIATIONS ADB Asian Development Bank JICA Japan International Cooperation Agency AFUE Annual Fuel Utilization Efficiency Kcal Kilocalorie BEEC Building Energy Efficiency Centre kW Kilowatt CAF Clean Air Foundation kWh Kilowatt hour CCAC Climate and Clean Air Coalition MCC Millennium Challenge Corporation CES Central Energy System MJ Mega joule CHPP Combined heat and power Plant MNT Mongolian Tugrik CO Carbon Monoxide MoE Ministry of Energy, Mongolia MoET CO2 Carbon Dioxide Ministry of Environment and Tourism, Mongolia DSWH Domestic Solar Water Heater MW Megawatt DTI Debt-to-Income NPV Net Present Value ECM Energy Conservation Measures PM Particulate Matter EE Energy Efficiency PV Photovoltaics EES Eastern Energy System RE Renewable Energy ERC Mongolian Energy Regulatory Commission SEC Specific Energy Consumption FS Frankfurt School of Finance & Management TA Technical assistance GHG Greenhouse Gas TSC Technical Standards Committee German Federal Enterprise for International UB Ulaanbaatar GIZ Cooperation UNEP UN Environment Programme IRR Internal Rate of Return USD US dollar ISO International Organization for Standardization WB The World Bank WES Western Energy System Exchange rate: 1 MNT = 0.0004 USD 2 Abbreviations EXECUTIVE SUMMARY This report presents the findings of a Climate and Clean Air Coalition (CCAC) study to assess the feasibility of a household energy finance facility to provide affordable end-user finance for residents of Ulaanbaatar’s ger districts, for purchase of low-polluting, household heating technology. In recent years, the air quality of Ulaanbaatar has deteriorated and, during winter months, the city now ranks amongst the most polluted cities globally. In spite of continued efforts to improve the air quality, continual migration to Ulaanbaatar has caused the problem to worsen. Much of the population growth has been in the city’s low-income ger1 (Mongolian national dwelling) districts, where coal, wood, and hazardous non-conventional fuels, such as house- hold waste, are burned for heat. This has led to significant increases in the capital city’s air pollution emissions. Previous efforts to improve the city’s air quality have focused on stove-switching and the subsidized sale of 144,000 efficient stoves to residents of the ger district.2 While these programs had initial success, issues with stove breakage, continued migration to the city, and 40 percent of the stoves distributed being resold outside of the city have combined to undermine their initial impact. In May 2018, a team from the CCAC led by UN Environment (UNEP) and the Frankfurt School of Finance and Management (FS), travelled to Ulaanbaatar to meet with XacBank, a Mongolian Commercial Bank, to investigate the feasibility of setting up a household, end-user finance facility to assist ger residents in the purchase of cleaner household heating alternatives in order to replace the inefficient traditional heat stoves that are presently used in the gers. The CCAC team met with a range of stakeholders, including ger residents, local and national government, academics, engineers, and technology suppliers, in order to assess the available technological solutions and make an assessment of those that are appropriate for house- holds in the Ulaanbaatar ger districts. To evaluate which technologies are appropriate in this context, it was necessary to consider a number of factors, as described in the following sections. POLICY Since the 1990s, various measures have been implemented by the government in an attempt to reduce the severity of air pollution in Ulaanbaatar, often targeted at improving cooking and heat stoves for households in the ger districts. Following the 2016 Parliamentary elections, the newly formed Government of Mongolia (led by the Mongolian People’s Party) developed the National Action Plan for Reducing Air and Environmental Pollution. The plan contains measures designed to tackle Ulaanbaatar’s air pollution problem. Implementation of the following steps is particularly relevant: ◼ a 50–100 percent discount for off-peak electricity consumption for ger district households ◼ a gradual prohibition of the use of raw coal for household heating ◼ the expansion of the electricity distribution network and sub-stations in the ger district ◼ the development of standards for household electrical heaters ◼ tax exemptions for domestic products with advanced and environmentally friendly technology 1. The ger is the traditional Mongolian domicile and consists of a wooden frame and a layering of different ‘blankets.’ 2. The World Bank Clean Air Project successfully disseminated 40,830 efficient stoves, and the MCC project sold a total of 103,255 subsidized stoves. Financing Household Clean Energy Solutions iii ◼ the development of regulations to incentivize citizens and businesses in the area to miti- gate environmental pollution, reduce heat loss, and improve energy efficiency. ENERGY SITUATION During winter months, temperatures in Ulaanbaatar regularly fall to –20°C, so keeping warm becomes a fundamental aspect of survival. A range of stoves are used in the households of the ger districts. The traditional stoves are constructed from cast iron and have poor thermal properties, retaining heat for a maximum of three hours after firing, and producing up to 20 times