Public Disclosure Authorized CDCE I ~~~~~~~~~~CD,=r/j~/ Public Disclosure Authorized -m~~~mJ c-i~~~~~~~~~~~~~~~~~~~~~~ NM*m JD~~~~~~~~~~~~~I o "fl eft - /~~~~~~~~~~~~~~~~~~4 Public Disclosure Authorized Public Disclosure Authorized STUDIES OF ECONOMIES IN TRANSFORMATION No. 1 Country Department 111,Europe and Central Asia Region, Foodand AgriculturalPolicy Reforms in the Former USSR: An Agendafor the Transition No. 2 Michalopoulos and Tarr, Trade and Payments Arrangementsfor States of the Former USSR No. 3 Country Department III, Europe and Central Asia Region, StatisticalHandbook: States of the Forner USSR No. 4 Barr, Income Transfersand the Social Safety Net in Russia No. 5 Country Department III, Europe and Central Asia Region, ForeignDirect Investment in the States of the Former USSR No. 6 Wallich, FiscalDecentralization: Intergovernmental Relations in Russia No. 7 Michalopoulos, Trade Issues in the New IndependentStates No. 8 The World Bank, StatisticalHandbook 1993: States of the Former USSR No. 9 Holt, TransportStrategies for the Russian Federation No. 10 Fong, The Role of Women in Rebuildingthe Russian Economy No. 11 de Melo and Ofer, PrivateService Firms in a TransitionalEconomy: Findingsof a Survey in St. Petersburg No. 12 Chu and Grais, MacroeconomicConsequences of Energy Supply Shocksin Ukraine No. 13 Michalopoulos and Tarr, Trade in the New Independent States No. 14 The World Bank, StatisticalHandbook 1994: States of the Former USSR No. 15 The World Bank, Russia : Creating PrivateEnterprises and Efficient Markets No. 16 Lieberman, Ewing, Mejstrick, Mukherjee, and Rahuja, Mass Privatizationin Central and Eastern Europe and the FormerSoviet Union: A Comparative Analysis No. 17 Le Houerou, Investment Policyin Russia No. 18 Belkindas and Ivanova, ForeignTrade Statisticsin the USSR and SuccessorStates No. 19 The World Bank, StatisticalHandbook 1995: States of the Former USSR No. 20 Kaminski, Wang, and Winters, ForeignTrade in the Transition:The InternationalEnvironment and Domestic Policy No. 21 The World Bank, StatisticalHandbook 1996: States of the Former USSR No. 22 Ehrenhaft, Hindley, Michalopoulos, and Winters, Policieson Importsfrom Economies in Transition: Two Case Studies No. 23 Lieberman, Nestor, and Desai, Between State and Market: Mass Privatizationin TransitionEconomies STUDI ES OF ECONOMIES IN TRANSFORMATION 24 Investmentsto Improvethe Energy Efficiencyof ExistingResidential Buildingsin Countriesof the FormerSoviet Union EricMartinot T H E W O R L D B A N K CopyrightC) 1997 The Intemational Bankfor Reconstruction and Development/THEWORLD BANK 1818 H Street, N.W. Washington,D.C. 20433,U.S.A. All rightsreserved Manufacturedin the United Statesof America Firstprinting September1997 Papersin the Studiesof Economiesin Transformationseries present the resultsof policy analysis and researchon the states of the formerUSSR. The papersare preparedby WorldBank staff and consultantsand issuedby the World Bank'sEurope and Central AsiaDepartment III underthe supervisionof MarceloSelowsky. In light of the worldwide interestin the problemsand prospectsof these countries,dissemination of these findingsis encouragedfor discussion and comment. 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EricMartinot is a consultantto the WorldBank and senior scientistat the StockholmEnvironment Institute of Boston. ISSN: 1014-997X Library of Congress Cataloging-in-PublicationData Martinot, Eric 1962- Investmentsto improvethe energyefficiency of existing residentialbuildings in countriesof the formerSoviet Union / Eric Martinot. p. cm-(Studies of economiesin transformation ; 24) Includesbibliographical references. ISBN0-$213-4057-3 1. Apartmenthouses-Govemment policy-Former Soviet republics. 2. Apartmenthouses-Energy conservation-Former Soviet republics. 3. Heating from central stations-Economic aspects-Former Soviet republics. 4. Energyconservation-Economic aspects-Former Soviet republics. 5. Housingpolicy-Former Soviet republics. 1. Title. 11. Series: Studiesof economiesin transformation ; paper no. 24. HD7287.6.F67M37 1997 333.79'63.'0947--dc21 97-29354 CIP "All our salaries and pensionsare burningup in the stoves of municipalheating stations" --First Deputy Premier of the Russian Federation Boris Nemtsov, as quoted by the Los Angeles Times, March 1997 iii t CONTENTS Abstract .................................................................. viii Acknowledgments .............................................................. ix Chapter 1: Introduction ............................................ 1 1.1 The Importanceof EnergyEfficiency to the HousingProblem ................................... 1 1.2 Originsand Objectivesof the Report.......................................................... 3 1.3 Organizationof the Report.......................................................... 5 Chapter 2: The Housing Problem in Countries of the Former Soviet Union ........................ 7 2.1 ResidentialBuildings, Energy Consumption, and DistrictHeating ............. ................7 2.2 Stakeholdersin the HousingProblem ......................................................... 12 2.3 HousingPrivatization, Responsibility, and Markets for MaintenanceServices ......... 14 2.4 Restructuringof EnterpriseSocial Assets ......................................................... 16 2.5 Utility ServicesRestructuring and Regulation......................................................... 16 2.6 Financing,Mortgage Lending, and CommercialBanks ............................................ 18 2.7 Housingand Utility Subsidiesand TargetedHousing Allowances . 19 2.8 The Constructionand Building-MaterialsIndustries ................................................ 21 Chapter3: Technical-EconomicOpportunities for EnergyEfficiency ................................ 25 3.1 Overviewof Technical-EconomicOpportunities ........................................... .......... 25 3.2 Basic TechnicalMeasures .............................................................. 27 3.3 Costs and Energy Savingsfrom Combinationsof Measures..................................... 33 3.4 Rates of Return and SensitivityAnalysis .............................................................. 38 3.5 Problemswith Energy-Savings Performance Estimates ............................................ 39 3.6 Improvementsin District-HeatingSupply and DistributionSystems ........... .............40 3.7 AutonomousSources of Heat Supply.............................................................. 42 3.8 FinancialSavings vs. Fuel Savingsand the MarginalCost of Heat........................... 44 Chapter4: LinkagesBetween EnergyEfficiency and the HousingProblem .. ....................47 4.1 The Influenceof EnergyEfficiency on Housing-SectorTransitions ............ .............47 4.2 The Influenceof Housing-SectorTransitions on EnergyEfficiency Investments ...... 48 4.3 Incentivesfor Investingin EnergyEfficiency ......................................................... 49 4.4 TransactionBarriers to EnergyEfficiency Investments ............................................ 53 4.5 Returns from EnergyEfficiency Investments ......................................................... 57 4.6 Households'Willingness to Pay for EnergyEfficiency Investments ............ .............60 4.7 Social Transitionsand Low-IncomeHouseholds ................................................ 61 4.8 Heat-SupplyMarkets, Management, and Regulationin Transition........................... 62 v Chapter 5: Energy EfficiencyInvestment Project Design and Implementation .................6!5 5.1 Policy Objectives:Housing Versus Energy Efficiency ................ 65.........................6'5 5.2 Energy-RelatedPolicies and CapacityBuilding for EnergyEfficiency Investments .. 66 5.3 Project Example: The RussianFederation Enterprise Housing Divestiture Project.. 73 5.4 Project Example: The LithuaniaEnergy Efficiency/Housing Pilot Project ... 74 5.5 Project Monitoringand