Mon­go­lia tar­gets ESCOs to achieve SDGs

The UB Post - - Front Page - By M.OYUNGEREL

To achieve its com­mit­ments to im­prove en­ergy ef­fi­ciency by 20 per­cent within the coun­try’s Sus­tain­able De­vel­op­ment frame­work, Mon­go­lia is fo­cus­ing on re­duc­ing en­ergy con­sump­tion of 135 des­ig­nated en­ti­ties by in­creas­ing their en­ergy ef­fi­ciency through en­ergy ser­vice com­pa­nies (ESCOs). Re­cently, a three-day work­shop on ESCOs was or­ga­nized by The Deutsche Ge­sellschaft­fur In­ter­na­tionale Zusam­me­nar­beit GmbH (GIZ) and En­ergy Con­ser­va­tion Depart­ment (ECD) of the En­ergy Reg­u­la­tory Com­mis­sion (ERC) ex­plor­ing op­por­tu­ni­ties and re­quired co­op­er­a­tion to es­tab­lish ESCOs in Mon­go­lia.

Head of ECD Ts.Atar­jar­gal an­nounced at the work­shop that Mon­go­lia is learn­ing from Latvia’s case and other ESCOs to use the En­ergy Per­for­mance Con­tract (EPC) fi­nanc­ing sys­tem in im­ple­ment­ing the Na­tional En­ergy Ef­fi­ciency Ac­tion Pro­gram 2017-2020.

Ac­cord­ing to trainer of the work­shop Eric Ber­man, sim­ply put, ESCO is a con­cept in which en­gi­neer­ing com­pa­nies that pre­vi­ously rented out their ser­vice and cer­tain gear or prod­uct started sell­ing their per­for­mance in­stead. Ber­man is the founder of Re­nesco, the first ren­o­va­tion and en­ergy ser­vice com­pany, with an em­pha­sis on ren­o­va­tion and retro-fit­ting as a hous­ing so­lu­tion for low and mid­dle in­come house­holds.

“The en­ergy com­po­nent is ac­tu­ally the way to pay for the ren­o­va­tion,” he said. The ESCO solves its fi­nanc­ing through what’s called an EPC. The EPC is a sim­ple ar­range­ment where usu­ally an ESCO rep­re­sents the clients and takes their tech­ni­cal re­spon­si­bil­ity to de­liver en­ergy ef­fi­ciency, and use the in­come from the cost sav­ings to pay for the bank loan. “It re­quires trans­parency and clar­ity, and makes it eas­ier to quan­tify the ben­e­fits to fi­nance these very long-term ren­o­va­tion con­tracts,” said Ber­man.

The EPC is not a new con­cept. “[EPC was com­mon] mainly on the man­u­fac­tur­ing, sup­ply side, as [hu­mans] pro­duced a lot but also spent a lot of en­ergy do­ing that. So some­one 30, 40 years ago said, ‘Hey, you can im­prove your en­ergy con­sump­tion by this much, and we’ll help you do that.’ So it refers to im­prov­ing the en­ergy con­sump­tion of any type of pro­duc­tion. It could be en­ergy it­self, any­thing. On the de­mand side, it’s a bit less com­mon. In Amer­ica, they use it in their pub­lic sec­tor, for au­thor­i­ties to not just re­duce en­ergy con­sump­tion, but very much for the main­te­nance of their prop­er­ties. It cre­ates clar­ity for the owner, to un­bur­den them of the is­sues of how to main­tain the build­ing, as the build­ing owner is not nec­es­sar­ily an en­gi­neer, so we have to out­source that,” Ber­man said.

Re­nesco was estab­lished in Latvia, a post-Soviet coun­try sim­i­lar to Mon­go­lia in terms of hous­ing. Their busi­ness model runs some­what like this: Let’s imag­ine that an apart­ment’s Home Owner’s As­so­ci­a­tion (HOA) paid for 400 MWh elec­tric­ity to the House Main­te­nance Com­pany (HMC). The HOA and the whole apart­ments shall agree on a de­mand for ren­o­va­tion. After the HOA signs a pre­lim­i­nary EPC with the ESCO, the ESCO uses its own funds to pay for the en­ergy au­dit­ing and tech­ni­cal scop­ing. This project de­vel­op­ment process takes about six to eight months. Af­ter­wards, the ac­tual EPC of 20 years is signed and fi­nanced by a bank. They sign a con­tract with the con­struc­tion com­pany to per­form the ren­o­va­tion, which takes place for three to nine months. The ren­o­va­tion prom­ises an av­er­age in­door tem­per­a­ture of 21 de­grees Cel­sius, 55 per­cent of im­proved en­ergy ef­fi­ciency, en­hanced com­fort, ap­pear­ance and over­all liv­abil­ity, which in­creases the over­all price of the apart­ment should the owner de­cide to rent or sell. The hous­ing com­mis­sion will then ac­cept the ren­o­vated build­ing. Now, the ren­o­vated build­ing will be sav­ing 220 MWh elec­tric­ity, but the client will be pay­ing 400 MWh still. The HMC will al­lo­cate the 180 MWh elec­tric­ity pay­ment to the heat provider, and the 220 MWh elec­tric­ity pay­ment will be go­ing to the ESCO, which will in turn pay back the con­struc­tion com­pany, banks, in­vestors, and other lo­gis­tics. Way be­fore the 20 years, the bank loans will be re­paid, in­vestors will be getting profit, the apart­ment main­te­nance will be con­ducted based on need by the con­struc­tion com­pany, and 20 years later, the EPC is fin­ished. To quote Ber­man, “It’s a win-win sit­u­a­tion. So the ques­tion is, why are you not do­ing it al­ready?”

Mon­go­lia is com­mit­ted to in­creas­ing its en­ergy ef­fi­ciency by 20 per­cent within 2030. “By the term im­prov­ing en­ergy ef­fi­ciency, we in­clude im­prov­ing ef­fi­ciency in all stages, in­clud­ing pro­duc­tion, trans­fer, dis­tri­bu­tion, and client,” said Ts. Atar­jar­gal.

He sees ESCOs as an op­por­tu­nity to sup­ply the in­crease in en­ergy con­sump­tion with low in­vest­ment spend­ing, as sav­ing 1MW elec­tric­ity is equal to build­ing an en­ergy source for 1 MW.

Mon­go­lians are plan­ning to use the EPC, ini­tially to fi­nance for the en­ergy ef­fi­ciency im­prove­ment for 135 des­ig­nated en­ti­ties. Ac­cord­ing to the En­ergy Con­ser­va­tion Law, des­ig­nated en­ti­ties are those whose con­sump­tion of heat and/or elec­tric­ity ex­ceeded the thresh­old set by the gov­ern­ment for con­ser­va­tion po­ten­tial. They are now re­spon­si­ble for their build­ings’ en­ergy ef­fi­ciency and the ERC is re­spon­si­ble for iden­ti­fy­ing these en­ti­ties, mon­i­tor­ing their ef­forts to per­form en­ergy au­dits, and re­port their achieved en­ergy sav­ings. The head of ECD of ERC Atar­jar­gal said that im­prov­ing en­ergy ef­fi­ciency even by 15 per­cent in the 135 des­ig­nated en­ti­ties can pre­vent 678,600 tons of car­bon diox­ide emis­sions and save 685.5 mil­lion kWh en­ergy, which is equiv­a­lent to the en­ergy con­sump­tion of 228,000 fam­i­lies (59 per­cent of UB fam­i­lies as of 2017) and dou­ble the an­nual en­ergy pro­duc­tion of Darkhan power plant. The client will save ap­prox­i­mately 90 bil­lion MNT from en­ergy sav­ings. This is be­cause although fac­to­ries and en­ti­ties only make up 7.5 per­cent of the en­ergy users, they use 72.1 per­cent of to­tal en­ergy pro­duced, or 3,464 mil­lion kWh of elec­tric­ity. Of the 3,464 mil­lion, 1,988 or 57 per­cent is used by 135 en­ti­ties.

“Where there is abun­dance of us­age, there’s an abun­dance of op­por­tu­nity for en­ergy sav­ings,” says Ts. Atar­jar­gal.

These en­ti­ties are now legally en­ti­tled to cre­ate a fixed job po­si­tion within their com­pa­nies for en­ergy man­ager, have their en­ergy man­ager trained, in­stall me­ter­ing sys­tem, send their en­ergy re­port of the last three years within six months to the ERC, have en­ergy au­dit­ing con­ducted within 18 months of no­tice and after that, once ev­ery three years, and send to the ERC an en­ergy con­ser­va­tion plan, mon­i­tor ac­cord­ingly and re­port on the re­sults.

Within 2022, des­ig­nated en­ti­ties have to achieve a 10 per­cent en­ergy ef­fi­ciency, com­pared to that of 2016. To do so, Mon­go­lia faces two is­sues, ac­cord­ing to Ts. Atar­jar­gal.

“One, tech­ni­cal con­sul­tancy and im­ple­men­ta­tion, and two, fi­nan­cial. To solve both these is­sues, we’re im­ple­ment­ing the ESCO mech­a­nism, which is cre­at­ing sav­ings with fi­nanc­ing from a third party with the least pos­si­ble strain/ bur­den on the home owner. We are work­ing on this in the end of 2018 and by 2019, we see that ESCO mech­a­nisms will be able to start 100 per­cent,” he said.

From an en­ergy au­dit­ing of 15 en­ti­ties con­ducted by PwC, through a mem­o­ran­dum signed with ERC and GGGI, it was proven that there was a lot of room for im­prove­ment for des­ig­nated en­ti­ties. For in­stance, 44.28 per­cent of en­ergy sav­ings (from con­sump­tion) could be achieved at State Hos­pi­tal No. 3, 41.51 per­cent at Makh Im­pex LC, and 20.82 per­cent at Mon­go­lian Na­tional Broad­caster.

The ERC’s next fo­cus is to de­crease heat loss and im­prove en­ergy ef­fi­ciency of state build­ings run by the state bud­get.

“As it is paid for by the tax­pay­ers, they have to work ef­fi­ciently. We stud­ied pos­si­bil­i­ties by ren­o­vat­ing and test­ing their en­ergy ef­fi­ciency,” said the head of ECD. In Khovd and Zavkhan prov­inces, 16 schools, kinder­gartens, and hos­pi­tals were ren­o­vated. They pre­vi­ously used 7.75 mil­lion kWh per year, and after ren­o­va­tion, they used 2.98 mil­lion kWh per year. This is a 61 per­cent sav­ings.

“As the build­ings are com­pletely de­pen­dent on the state bud­get, we have to use the ESCO mech­a­nism. But we have to work in close co­or­di­na­tion with the pol­icy of Min­istry of Fi­nance and the Law on State Bud­get,” he said.

Although the ben­e­fits won’t be achieved in the near fu­ture, the fi­nan­cial bur­den from hous­ing will be lifted ex­ten­sively in the long run. Ac­cord­ing to Ts.Atar­jar­gal, Mon­go­lia has 640 schools pay­ing 173 bil­lion MNT an­nu­ally for en­ergy alone.

“Let’s imag­ine the most min­i­mal en­ergy ef­fi­ciency in­crease of 10 per­cent, we change its doors and win­dows, then we’re talk­ing about a 17 bil­lion MNT is­sue. How many schools can we build with 17 bil­lion MNT? For in­su­la­tion, we’ll maybe spend 600 mil­lion, one bil­lion MNT, what­ever. This is still triv­ial com­pared to the im­proved en­vi­ron­ment, air qual­ity, and over­all com­fort for chil­dren. This will also mean that we’ll burn less coal, which ul­ti­mately im­proves air qual­ity. Most of these build­ings were also built around the 70s and 80s. So by ren­o­vat­ing, we also add 20 years to their longevity,” he said.

To im­ple­ment ev­ery new con­cept, there’s al­ways a need for ex­ten­sive ca­pac­ity build­ing, to equip in­di­vid­u­als and ex­ist­ing com­pa­nies with le­gal, tech­ni­cal, and fi­nan­cial tools and knowl­edge.

In Mon­go­lia, 95 en­ergy man­agers, 85 au­di­tors, eight au­dit com­pa­nies, and an ESCO are be­ing trained. As for the pol­icy and le­gal en­vi­ron­ment, a reg­u­la­tion was passed on giv­ing per­mis­sion to en­ergy au­dit and ESCOs and the ERC said it will cre­ate ESCOs by pol­icy, by en­abling ex­ist­ing com­pa­nies.

For the cre­ation of an ESCO, ca­pac­ity build­ing train­ings and work­shops are be­ing or­ga­nized in part­ner­ship with var­i­ous in­ter­na­tional part­ners and or­ga­ni­za­tions. Ac­cord­ing to Ts.Atar­jar­gal, the best ex­am­ples of ESCOs are in China. The ERC vis­ited China and signed a mem­o­ran­dum for Chi­nese ESCOs to work with Mon­go­lian ESCOs for ca­pac­ity build­ing.

“We are de­vel­op­ing var­i­ous mod­els, by learn­ing from Chi­nese and Euro­pean ESCOs, and cre­at­ing our own do­mes­tic busi­ness model, fi­nanc­ing sys­tem, and EPCs so that it can fit and work well in Mon­go­lia. Firstly, ca­pac­ity build­ing for them, so that they start bear­ing a pos­i­tive con­no­ta­tion. The num­ber will also be capped and reg­u­lated by the ERC,” ex­pressed Ts.Atar­jar­gal.

These ac­tions are one of many steps be­ing taken by the ERC, in part­ner­ship with min­istries, and in­ter­na­tional or­ga­ni­za­tions such as GGGI and GIZ, in ac­cor­dance with the En­ergy Con­ser­va­tion Law and Na­tional En­ergy Ef­fi­ciency Ac­tion Pro­gram 20172020. This ac­tion plan con­tains in it­self mul­ti­ple in­no­va­tive if im­ple­mented con­cepts, namely a tax re­ward sys­tem, en­ergy ef­fi­cient prod­uct la­belling, and thirdly, im­prov­ing the en­ergy ef­fi­ciency of 135 en­ti­ties.

If all goes well, we could move on to bet­ter hous­ing and ren­o­vat­ing of Soviet-era build­ings, to fa­cil­i­tate low and mid­dle in­come house­holds. Ber­man noted that it’s not only just achiev­ing en­ergy ef­fi­ciency, it is im­prov­ing the liveli­hood of many.

“The ra­tio­nale to do some­thing about the build­ings is not just the en­ergy sav­ing po­ten­tial, which is sub­stan­tial, with car­bon diox­ide re­duc­tions, and all. But sim­ply, it’s for the preser­va­tion of these build­ings, the com­fort and value of these build­ings and mak­ing them a safe good home for the next four, five gen­er­a­tions. You need them be­cause you have a great short­age of square me­ters. You need them.”

Ber­man notes low elec­tric­ity price as a chal­lenge to build­ing an ESCO sys­tem in Mon­go­lia.

“In Latvia, en­ergy sav­ings are sub­stan­tial as our tar­iff is de­cent. It’s the low­est in Europe, but it’s de­cent. It pays for al­most all of our costs and en­ables ad­di­tional costs for some main­te­nance and ser­vices that are agreed with the own­ers of the build­ing. In Mon­go­lia, you have a sym­bolic price of heat­ing. There is no such pos­si­bil­ity. Ei­ther the heat­ing tar­iffs have to go up sub­stan­tially, or there would have to be a whole dif­fer­ent source of rev­enue. Be­cause although there’s a lot of en­ergy you can save, the en­ergy sav­ings won’t be worth much here,” stressed Ber­man.

“It’s also crazy, con­sid­er­ing Latvia is rel­a­tively cold. Mon­go­lia is twice as cold, ex­cep­tion­ally cold. If we use the pa­ram­e­ter called de­gree days, which is the mea­sure­ment of cold over the pe­riod that you’re heat­ing, it is al­most dou­ble. And your en­ergy con­sump­tion there­fore is twice that. Con­sid­er­ing that they’re so poorly built, it’s very hard to un­der­stand that in such a cold coun­try, you could have such in­cred­i­bly poorly built build­ings with such low en­ergy val­ues. This would be un­ac­cept­able in the Nether­lands, where I orig­i­nally come from. If you wanted peo­ple to be ra­tio­nal with re­sources, price them. And if you don’t price them, peo­ple don’t care. That’s the pol­icy that Mon­go­lia seems to have had for such a long time. It stems from the Soviet era, that there are no me­ters even. I was flab­ber­gasted when I first vis­ited Eastern Europe. But to have a large cap­i­tal like Ulaan­baatar, not mea­sur­ing the heat that goes into the build­ing, to me, is re­ally strange,” he said.

In or­der to im­ple­ment ESCOs, there are var­i­ous chal­lenges.

“For any type of busi­ness and con­tract, which goes on for 20 years, you need trust. You need a lot of trust. Pric­ing, we men­tioned, and sta­bil­ity. There are three things you need for an ESCO: First, heat­ing tar­iff, you need a price, which should be trans­par­ent and not ma­nip­u­lated, so that fi­nanciers and ESCOs un­der­stand what’s hap­pen­ing to the pric­ing. The sec­ond is, you need a rea­son­able price of cap­i­tal. If cap­i­tal is very ex­pen­sive, if the po­lit­i­cal sit­u­a­tion is very un­sta­ble, banks feel in­se­cure. That means cap­i­tal is priced very high, mean­ing high in­ter­est rates. The ex­pen­sive cap­i­tal will have a di­rect im­pact on the af­ford­abil­ity of the in­vest­ment and sav­ing en­ergy. On the long term con­tract, one per­cent in­ter­est rate is equiv­a­lent to 10 per­cent in­crease or de­crease in in­vest­ment cost. It’s huge. Thirdly, this might be the most im­por­tant thing, is the rule of law. These are in­vest­ments based on con­tract, a piece of pa­per. You have to know for sure that this con­tract is un­break­able. That if you say you’re go­ing to do it like that for 20 years, that it will hold up in court. That no­body can just chal­lenge it or get away with not liv­ing up to it and just walk away from it. Be­cause, with the in­vest­ments that we have, we can­not walk away from it. The ESCO has that money sunk, you can­not undo a ren­o­va­tion. I be­lieve that’s what I heard are ma­jor is­sues. I’ve talked to banks here, and they do not be­lieve, at least at first sight now, that these con­tracts will hold up. Although in Latvia, we had the same is­sue. They didn’t be­lieve it. We had to con­vince them and talk with them a long time for them to see, but now, after eight, nine years, they agree, ‘Oh, these con­tracts are ac­tu­ally hold­ing up quite well.’ They might hold up a lot nicer than banks think, although the po­lit­i­cal en­vi­ron­ment can be ever chang­ing, which is chal­leng­ing. But what­ever gov­ern­ment is here to­day, we’ll still be here. So, I have a bit mixed feel­ings about this, how good such a con­tract will hold up in Mon­go­lia. But there will be dis­trust from the in­sti­tu­tions here. You’d have to prove it to them,” Ber­man said.

Im­ple­ment­ing the ESCO mech­a­nis­mis ben­e­fi­cial to both the peo­ple and the en­vi­ron­ment. It helps cope with ex­po­nen­tial pop­u­la­tion growth and lifts re­lated fi­nan­cial risks for the coun­try. How­ever, with the po­lit­i­cal in­sta­bil­ity and fi­nan­cial in­cen­tives from gov­ern­ment of­fi­cials, one could only hope that ESCOs come to re­al­ity, cre­ate a bet­ter en­vi­ron­ment for the chil­dren, and in the fu­ture, con­trib­ute to cre­at­ing vi­able hous­ing so­lu­tions for low and mid­dle in­come house­holds.

...If all goes well, we could move on

to bet­ter hous­ing and ren­o­vat­ing of Soviet-era build­ings, to fa­cil­i­tate low and mid­dle in­come house­holds...

A retro­fit­ted school in Zavkan­man­dal soum, Zavkhan Prov­ince - GIZ Anna Klein­schroth

A school in Zavkhan­man­dal soum, Zavkhan Prov­ince be­forere­ha­bil­i­ta­tion Copy­righted by GIZ Anna Klein­schroth

Ex­am­ple of pub­lic hous­ing lo­cated in Chin­gel­tei District after ren­o­va­tion

Ex­am­ple of pub­lic hous­ing lo­cated in Chin­gel­tei District be­fore ren­o­va­tion

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