Silvia LAZAROVA. July, Budapest

Transcription

1 A thesis submitted to the Department of Environmental Sciences and Policy of Central European University in part fulfillment of the Degree of Master of Science Barriers to energy efficiency at a municipal level: case studies of Bulgaria and the Former Yugoslav Republic of Macedonia Silvia LAZAROVA July, 2002 Budapest

2 Notes on copyright and the ownership of intellectual property rights: (1) Copyright in text of this thesis rests with the Author. Copies (by any process) either in full, or of extracts, may be made only in accordance with instructions given by the Author and lodged in the Central European University Library. Details may be obtained from the Librarian. This page must form part of any such copies made. Further copies (by any process) of copies made in accordance with such instructions may not be made without the permission (in writing) of the Author. (2) The ownership of any intellectual property rights which may be described in this thesis is vested in the Central European University, subject to any prior agreement to the contrary, and may not be made available for use by third parties without the written permission of the University, which will prescribe the terms and conditions of any such agreement. (3) For bibliographic and reference purposes this thesis should be referred to as: Lazarova, S Barriers to energy efficiency at a municipal level: case studies of Bulgaria and the Former Yugoslav Republic of Macedonia. Master of Science thesis, Department of Environmental Sciences and Policy, Central European University, Budapest. Further information on the conditions under which disclosures and exploitation may take place is available from the Head of the Department of Environmental Sciences and Policy, Central European University. ii

3 Author s declaration No portion of the work referred to in this thesis has been submitted in support of an application for another degree or qualification of this or any other university or other institute of learning. Silvia LAZAROVA iii

4 Table of Contents CHAPTER 1: MOTIVATION, AIM AND OBJECTIVES Introduction Motivation Aim and objectives... 3 CHAPTER 2: METHODOLOGY Theoretical part: preparatory stage Practical part Review of legislation Interviews Analysis of the data Structure of the thesis CHAPTER 3: POLICY MAKING FOR IMPROVEMENTS IN ENERGY EFFICIENCY Basic concepts of energy efficiency Barriers to energy efficiency The energy efficiency gap Barriers to energy efficiency Policy tools for energy efficiency Communication and information Training Regulatory instruments Voluntary agreements Financial incentives Demand-side management Integrated strategies for energy efficiency improvements Market transformation Providing accessible financial resource for implementation of measures for energy efficiency Energy system efficiency Emerging strategies Summary CHAPTER 4: LOCAL AUTHORITIES AND ENERGY EFFICIENCY Functions of local authorities The allocative function The distributive function The regulatory function The stabilizing function Local authorities in Bulgaria and Macedonia Bodies of local government Constraints of local governments in Bulgaria and Macedonia Summary CHAPTER 5: BARRIERS TO ENERGY EFFICIENCY IN BULGARIA Macroeconomic barriers to energy efficiency at a municipal level Legislative and regulatory deficiencies: the National Strategy for Energy and Energy Efficiency and the Law on Energy and Energy Efficiency The poor climate for investment Inadequate communication between institutions Energy tariffs and subsidies Electricity prices iv

5 Heating prices Ownership of streetlighting systems Summary of the macroeconomic barriers in Bulgaria Barriers to energy efficiency improvements arising from the current state of local self-government Discrepancies between the responsibilities of local authorities and the revenue to exercise them Municipal authority in Bulgaria in the light of energy-related tasks of local governments Municipal expenditure Municipal revenue Insufficient non-budgetary sources of municipal finance and associated problems ESCOs The Development Credit Authority The National Fund for Environment Protection and the National Trust Ecofund Others Summary of the barriers to energy efficiency improvements arising from the state of local selfgovernment Summary CHAPTER 6: THE ROOTS OF SUCCESS - THE MUNICIPALITIES OF GABROVO AND DOBRICH (TOWN) The municipality of Gabrovo General information Priorities of Gabrovo in the sphere of energy efficiency Financial aspects: municipal revenue and expenditure of Gabrovo Energy supply and demand in the municipality of Gabrovo Successful projects for energy efficiency improvements in the municipality of Gabrovo The project Strategy for reduction of greenhouse gas emissions through energy efficiency improvements. Demonstration zone for energy efficiency in Gabrovo, Republic of Bulgaria Other municipal projects for energy efficiency improvements The municipality of Dobrich (town) General information Priorities of Dobrich in the sphere of energy efficiency Financial aspects: municipal revenue and expenditure of Dobrich Energy supply and demand in the municipality Successful projects for energy efficiency improvements in the municipality of Dobrich (town) Conclusions and lessons to be learned in the Bulgarian context Recommendation for improvement of conditions at national and local levels that will facilitate the implementation of projects for energy efficiency at a municipal level in Bulgaria Recommendations for overcoming the macroeconomic barriers Recommendations for overcoming the barriers arising from the state of local self-government Summary CHAPTER 7: BARRIERS TO ENERGY EFFICIENCY IN MACEDONIA Macroeconomic barriers to energy efficiency Incomplete legislation Lack of an institutional framework Poor investment climate Accurate pricing Defined ownership of streetlightings Summary of macroeconomic barriers to energy efficiency in Macedonia Barriers to energy efficiency improvements arising from the current state of local self-government Unclear municipal responsibilities Undefined sources of municipal financing Expected provisions of the future law on municipal financing Current municipal expenditure and sources of revenue Summary v

6 CHAPTER 8: THE MUNICIPALITY OF KUMANOVO General information Priorities of Kumanovo in the sphere of energy efficiency Financial aspects: municipal revenue and expenditure of Kimanovo Sources of municipal revenue of Kumanovo Municipal expenditure of Kumanovo Energy supply and demand in the municipality of Kumanovo Future projects related to energy efficiency Conclusions and lessons to be learned Recommendation for improvement of conditions at national and local levels that will facilitate the implementation of projects for energy efficiency at a municipal level Recommendation for elimination of major barriers to energy efficiency at the national level Recommendations for overcoming the barriers arising from the state of local self-government Summary CHAPTER 9. SUMMARY OF FINDINGS AND CONCLUSION Summary of findings Final Remarks REFERENCE LIST LIST OF INTERVIEWEES AND OTHER PERSONAL COMMUNICATIONS APPENDIX I. QUESTIONNAIRES USED FOR THE INTERVIEWS AND PERSONAL COMMUNICATIONS APPENDIX II. LIST OF THE BULGARIAN AND MACEDONIAN LEGISLATION THE PROVISIONS OF WHICH HAVE BEEN CONSIDERED IN THE PRESENT STUDY vi

7 List of Tables Table 1.Objectives of the present study and methods applied to accomplish them Table 2. Major barriers to financing energy efficiency Table 3. Local government spending in the EU countries, Bulgaria and Macedonia as a percentage of GDP and as a percentage of all general expenditure in or shortly after Table 4. Sources of revenue of local government in the EU countries, Bulgaria and Macedonia in 1997, or shortly after Table 5. Electricity prices for residential and for industrial and commercial consumers in 2002 in Bulgaria (in Bulgarian leva/kwh) Table 6. Tax revenue in Bulgaria by type Table 7. General information about the project Strategy for reduction of greenhouse gas emissions through energy efficiency improvements. Demonstration zone for energy efficiency in Gabrovo, the Republic of Bulgaria Table 8. Total expected energy savings in the streetlighting system of the town of Gabrovo as a result of replacement of mercury lamps by high-pressure sodium lamps Table 9. Preliminary and total expected results of the project for improving the energy efficiency of streetlighting in the town of Gabrovo Table 10. Business plan of the first stage of the project for improving the energy efficiency of streetlighting in the town of Dobrich Table 11. Expected results from the first stage of the project for improving the energy efficiency of streetlighting system in Dobrich (town) Table 12. Summary of the major barriers to energy efficiency in Bulgaria and Macedonia. 125 vii

8 List of Figures Figure 1. Electricity prices for residential and industrial consumers in Bulgaria and other countries in or shortly after Figure 2. Structure of average municipal expenditure in 2001 in Bulgaria Figure 3. Structure of average municipal revenue in the period Figure 4. Structure of the state subsidies for Bulgarian municipalities in Figure 5. Structure of the municipal revenue of Gabrovo in the period Figure 6. Expenditure of the municipality of Gabrovo by type of functions in Figure 7. Expenditure of the municipality of Gabrovo by type of expenses in Figure 8. Final energy consumption in municipality of Gabrovo for 2000 by type of fuel Figure 9. Energy consumption in the activities and institutions related to the municipality of Dobrich (town) in Figure 10. Final energy consumption by type of fuel in the municipality of Dobrich (town) in Figure 11. Electricity prices for residential and industrial consumers in Macedonia and other countries in 2000 or shortly after Figure 12. Sources of budget revenue of the municipality of Kumanovo in Figure 13. Structure of the budget sources of revenue of the municipality of Kumanovo in viii

9 Acknowledgements I would like to thank to everybody who has contributed to the present study by advice, ideas, materials and publications, or simply by an encouraging talk. First, I would like to thank to my internal supervisor, Professor Diana Ürge-Vorsatz, and to my external supervisor, Mr Seth Baruch, for their academic guidance and support throughout the whole research period. I would also like to thank to the people who have helped me in the initial stages of the study: Mrs Klára Pankasz, of the Energy Centre, Budapest; Mr István Kovácsics, of EGI Contracting and Engineering, Budapest; and Mr Dimitar Doukov, of EnEffect, Sofia. I would like to express my gratitude to Professor Konstantin Dimitrov from the Department of Machine Engineering in the University of Skopje and to his assistant, Liljana Hadzhievska, for their support in providing contacts for the Macedonian part of my study. I would like to thank to Rositca Stancheva and Detelina Ivanoiva, the energy managers in Gabrovo and Dobrich respectively, for being so helpful and enthusiastic, for dedicating their time to me and providing me with all the data that I needed for my case studies. Last, but not least, I am also grateful to my parents and grandparents for the understanding of my ambition to dedicate most of my time, during the trip to Bulgaria, to the research occupations. I would like to thank also to András for his patience and support during the whole research period. To all of you: thank you, благодаря, and köszönöm! ix

10 THE CENTRAL EUROPEAN UNIVERSITY ABSTRACT OF THESIS submitted by: Silvia LAZAROVA for the degree of Master of Science and entitled: Barriers to energy efficiency at a municipal level: case studies of Bulgaria and the Former Yugoslav Republic of Macedonia Month and Year of submission: July, Energy efficiency is increasingly recognized as the key to decoupling of economic growth and the increase in energy consumption. Many cost-effective opportunities to employ energy efficiency as an alternative energy resource exist in countries in transition, because in these countries large amounts of energy are wasted. Municipalities have an essential role to play in taking these opportunities and applying measures for energy efficiency, since these are decentralized activities. For a number of reasons, however, local authorities are not always motivated to employ such measures. The purpose of this thesis is to investigate the existing barriers to the improvement of energy efficiency in municipalities in Bulgaria and in the Former Yugoslav Republic of Macedonia. The barriers are examined at two levels: national and local. Since local authorities function in the policy framework established by the central government, first some national level strategies and legal acts, together with the institutional frameworks and energy pricing are explored from the perspective of their deficiencies related to energy efficiency. Then the obstacles associated with the competencies of municipal authorities and the sources of revenue to exercise these are studied. In order to illustrate the current situation, two Bulgarian and one Macedonian municipalities are reviewed as case studies. The two Bulgarian municipalities are used as examples of what actions local authorities can implement in order to successfully overcome the existing barriers to energy efficiency. Therefore the author argues that local authorities can overcome these obstacles, provided that they are willing to take the initiative to improve energy efficiency and in doing so gain certain benefits. The Macedonian case study demonstrates that municipal authorities are not motivated to intervene and make improvements in spheres, for which they still do not feel clear responsibility. Finally, based on the identification and analysis of the impediments in both countries, recommendations are made for further action aimed at removing the existing barriers to energy efficiency in Bulgaria and Macedonia. Keywords: energy efficiency, barriers, municipalities, Bulgaria, the Former Yugoslav Republic of Macedonia x

11 Chapter 1: Motivation, aim and objectives 1.1. Introduction Throughout its entire history mankind has become increasingly dependent upon energy. Energy provides basic services, such as heating, lighting, materials, transport and communication, which support the existence of human societies (Grubb 1991). The problem that civilization faces today is not running out of energy resources in absolute terms, nor running out of technological options for transforming energy resources. The real concern is the capacity to expand energy supply at low cost, this last one including not only monetary, but as well environmental and sociopolitical components (Holdren 1992). The essence of the energy problem is in the delicate balance between energy benefits and energy costs. Today, at the end of the era of low-cost energy, it has become apparent that this balance, which reflects the connection between energy and human well being, has been disrupted. Capital and labor costs and raw materials, that have been devoted to obtaining and exploiting energy, together with environmental and sociopolitical impacts of energy supply and use have started to offset the benefits of consumer energy services (Holdren 1992). For this reason wasted energy is considered to be a major structural flaw in any economy, a sign of misallocated resources and a threat to global development. Furthermore, economic, political and environmental constraints encourage decision-makers to design policies that simultaneously fulfil the needs of sustainable development and minimize environmental damage and economic and social cost arising from energy production and consumption (Laponche et al. 1997). Environment quality suffers acutely from energy development in countries in transition (CITs). It is generally agreed that these countries have the potential to successfully address some of their energy problems through a number of policies, such as, for instance, energy efficiency strategies and fuel switching to natural gas (Chandler 2000). Among these 1

12 policy tools strong energy efficiency strategies are particularly important and urgently needed in CITs, since in these countries, as a rule, large amounts of energy are wasted (Laponche et al. 1997). Many cost-effective opportunities exist for improving energy efficiency which are not taken because of a variety of obstacles, including, though not limited to, deep-rooted market imperfections (Grubb 1991). Although the problem is no longer lack of money or attention, much of the debate about energy policy still centers on economic issues Motivation My choice to research energy efficiency at a municipal level is grounded in two considerations. Firstly, energy efficiency is increasingly recognized as an alternative energy resource (IIEC 1998). Moreover, for economic and security reasons strong energy efficiency strategies are of critical importance for CITs (Laponche et al. 1997). Secondly, energy efficiency improvement is by nature a decentralized activity, so municipalities have an essential role to play in ensuring appropriate conditions and applying measures for energy efficiency improvements. However, in some countries, such as Bulgaria and Macedonia, the discretionary powers of local governments have been constrained. Some powers have been taken away from local governments and those remaining to them have become subject to tighter controls: for example central government calculates what it considers each local government should spend on individual services and limits its revenue resources accordingly (Bailey 1999). Recent research conducted by the Bulgarian NGO, EnEffect, and a program called Municipal network for energy efficiency (MUNEE) of the American NGO Alliance to Save Energy, has disclosed that the major barriers to energy efficiency project implementation in Bulgaria are mostly situated in the restricted powers of the municipal authorities. In addition, 2

13 a study of major barriers to energy efficiency project implementation in Macedonia is relevant at this moment, due to the ongoing local government reform in that country. The increasing importance of energy efficiency at a municipal level in the context of constrained local government powers can be illustrated best through case studies. The aim of these case studies is to explore success stories which show the present situation and the means by which municipalities attempt to overcome some of the existing barriers, or the reasons for some of them not being motivated to undertake any action Aim and objectives The aim of the present study is to investigate the existing barriers to the improvement of energy efficiency at a local level and the particular actions undertaken by municipalities in Bulgaria to overcome these barriers, or the reasons for the lack of motivation for such action in municipalities the Former Yugoslav Republic of Macedonia (FYROM). In this thesis "Macedonia" is only used as a more meaningful name instead of the formally correct acronym FYROM for the term "Former Yugoslav Republic of Macedonia". The objectives are: (a) To identify and analyze barriers at national and local levels which inhibit Bulgarian and Macedonian municipalities from making energy efficiency improvements; (b) To review success stories which illustrate what benefits municipalities can gain if the existing barriers to efficiency are removed, (c) To investigate what actions municipalities implement in order to overcome the existing barriers to energy efficiency improvements; (d) To analyze why some municipalities (particularly in Macedonia) are not motivated to implement projects for energy efficiency improvements; 3

14 (e) To make recommendations for further action aimed at removing the existing barriers to energy efficiency improvements in Bulgaria and Macedonia. Two assumptions are made. First, it is assumed that in Macedonia barriers to energy efficiency improvements at a municipal level exist which are very similar to those in Bulgaria. Second, it is assumed that certain actions of municipal authorities can overcome at least some of these barriers. 4

15 Chapter 2: Methodology 2.1. Theoretical part: preparatory stage The preparatory stage of the research consisted of a review of the basic concepts of energy efficiency, of the most common barriers to energy efficiency improvements, and of the policy instruments and strategies that encourage energy efficiency improvements. The concept of barriers to the improvement of energy efficiency was examined and later discussed in relation to the functions and powers of local governments in Bulgaria and Macedonia. Most of the common barriers to energy efficiency improvements discussed in this review were afterwards observed by the author in the cause of visits to Bulgaria and Macedonia. I prepared two questionnaires Questionnaire 1 and Questionnaire 2 (attached in Appendix I). In Questionnaire 1 I took into consideration the research areas of a study on barriers to the improvement of energy efficiency at a local level in Bulgaria conducted in 2001 by the Bulgarian NGO, EnEffect, and a program called Municipal Network for energy efficiency (MUNEE) of the American NGO Alliance to Save Energy. Originally, five research areas were formulated for this study. Three of these I adopted as the conceptual framework for my own identification of barriers to energy efficiency in Macedonia. These research areas relate to municipal authority, municipal financing and electricity tariffs. I explored these three areas through thirteen open-ended questions in Questionnaire 1, divided into three sections corresponding to the three research areas selected. The other two research areas of the study by EnEffect and MUNEE are related to reforms in housing and district heating and water utility. They were disregarded in the present research, because these factors were found not to play a major role as barriers to energy efficiency projects at a municipal level in Bulgaria. There was no reason, therefore, to expect that these factors would play an important role in Macedonia (Baruch pers. comm.). Questionnaire 1 aims to identify the barriers to energy 5

16 efficiency improvements which the Bulgarian and Macedonian municipalities face on account of the existing national policies and legal framework. The purpose of Questionnaire 2 is to identify (a) the key actions taken to achieve results in certain success stories from Bulgaria and (b) the reasons why Macedonian municipalities are still not motivated to act in a similar way. Six areas were investigated by multiple choice questions. The areas are (a) municipal authority; (b) municipal energy management; (c) financial measures; (d) measures implemented; (e) information, awareness raising and consultancy; and (f) a summary of major obstacles to the implementation of energy efficiency projects in the particular municipality. The questions in Questionnaire 2 are based on my own review of measures for improving energy efficiency; they were formulated with the kind advice of Professor Diana Ürge-Vorsatz, of the Environmental Sciences and Policy department of the Central European University; Mrs Klára Pankasz, of the Energy Centre, Budapest; Mr István Kovácsics, of EGI Contracting and Engineering, Budapest; and Mr Dimitar Doukov, of EnEffect, Sofia Practical part Review of legislation In the next stage I reviewed the Bulgarian and Macedonian legislation, especially energy laws and the laws which define the powers of the units of local government and their financing. The Bulgarian laws on local self-government and local administration, on local taxes and fees, on municipal budgets, and on energy and energy efficiency are reviewed and the sections related to energy efficiency are discussed. The newly adopted Macedonian Law on Local Self-Government and the legal regulations of municipal financing are also studied. The purpose of this part of the research was to identify the legal constraints on energy 6

17 efficiency improvements at a local level. Appendix II contains a list of those Bulgarian and Macedonian laws the provisions of which are discussed here Interviews Questionnaire 1 and Questionnaire 2 were used in individual structured standardized interviews. The questionnaires were filled in with the help of my own explanations. I put the questions to the interviewees myself, formulating, where necessary, further ad hoc requests for information. I chose the interviewees by informant sampling and locating information-rich informants, as recommended by Punch (1998). I interviewed (1) representatives of NGOs in the fields of energy efficiency and of local government reform, and (2) representatives of the local authorities, such as the mayors, municipal energy efficiency managers and employees in the municipal institutions of the municipalities which feature in the case studies. I established contact, communicated and conducted interviews with some of the most prominent Bulgarian and Macedonian NGO representatives in the sphere of energy efficiency. This communication helped me to acquire a general understanding of the major barriers to energy efficiency at both national and local levels. I also contacted the municipal associations of Bulgaria and Macedonia. Experts from the National Association of the Municipalities in the Republic of Bulgaria (NAMRB) and from the Association of the Units of Local Self- Government in Macedonia (ZELS) provided me with useful publications on municipal financing. The interviews and other personal communication with members of NGOs working in the sphere of local government reform in Macedonia helped me to acquire an understanding of the general problems of the units of local self-government, with special reference to their authority, responsibilities and financing in the light of the ongoing local government reform. Finally, the interviews with representatives of local administration of three towns outlined the specific concerns of these municipalities, the concrete measures local 7

18 authorities have implemented in order to solve some of their problems and the reasons why some municipalities (particularly in Macedonia) have not been motivated to implement projects for energy efficiency improvements. Three medium-sized municipalities were chosen as instrumental case studies, as recommended by Stake (1998). The cases played a supportive role; by examining them I acquired many insights into the ways in which the barriers to energy efficiency function in practice (Stake 1998). My choice of case study towns was grounded in one major consideration: I wanted to research those municipalities which have been most active and most successful in implementing measures for energy efficiency improvements. However, this only proved possible in Bulgaria. The two Bulgarian municipalities, which I studied, are prominent for their activities related to energy efficiency improvements. My communications with Professor Dimitrov, who is the Macedonian coordinator of the project Regional Network for Efficient Use of Energy and Water Resources (RENEUER); with representatives of the municipality of Skopje; and with representatives of the Macedonian Local Government Reform Program (LGRP) of the United States Agency for International Development (USAID) revealed that Macedonian municipalities have not, so far, been motivated to implement any measures for energy efficiency improvements. I took the advice of Professor Dimitrov and chose a typical medium-size municipality the town of Kumanovo to investigate the reasons for this lack of interest and motivation on the part of of local authorities Analysis of the data The data on barriers to energy efficiency in Bulgaria and Macedonia was organized and analyzed at two levels: national (macroeconomic) and local. First, I made an analytical review of the barriers at the macroeconomic level, in order to facilitate a better understanding 8

19 of the overall situation. Next, I explored barriers to energy efficiency improvements at the local level, related mostly to municipal authority and financing. I used Miles and Huberman s (1994) framework for qualitative analysis. First, the data gathered at the previous stages was reduced by defining major categories and explaining these. The concept of macroeconomic barriers was discussed in relation to five major categories: (1) legislative and regulatory deficiencies; (2) poor investment climate, (3) the inadequate institutional framework; (4) energy tariffs and subsidies; and (5) ownership of streetlighting systems. The barriers arising from the current state of local self-government were discussed in relation to municipal responsibilities and municipal financing, this last including the insufficient non-budgetary sources of finance available to the municipalities. The organized and summarized data has also been displayed in graphic form. Finally, based on this data reduction and data display, conclusions were drawn as to the nature of the main barriers to energy efficiency in Bulgaria and Macedonia. These have been verified by the findings of the three case studies. The three municipalities chosen as case studies were studied in the light of two issues. These are (1) the common barriers that they face in their attempts to make energy efficiency improvements, and (2) their uniqueness (in the case of the Bulgarian municipalities) as to the successful implementations of projects for energy efficiency improvements. Data on the energy-related tasks of local governments was organized in five categories and analyzed in relation to the motivation of local authorities to make energy efficiency improvements and in relation to their sources of revenue and expenditure. These categories are (1) general information; (2) priorities in the sphere of energy efficiency; (3) municipal revenue and expenditure; (4) energy supply and demand of the municipality; and (5) successful projects (or, in the case of the Macedonian municipality of Kumanovo, future projects related to energy efficiency). 9

20 Table 1 summarizes the objectives of the present study and relates them to the methods applied. Table 1. Objectives of the present study and methods applied to accomplish them Objective To identify and analyze barriers to energy efficiency improvements at a local level in Bulgaria and Macedonia. To investigate (a) what is being done by municipal authorities in their attempts to overcome the existing barriers to energy efficiency improvements, or (b) what are the reasons for the lack of motivation in some municipal authorities to implement projects leading to improvements in energy efficiency. To review the success stories that illustrate what benefits municipalities can gain if the existing barriers to energy efficiency improvements are removed. To make recommendations for further action aimed at removing the existing barriers to energy efficiency improvements in Bulgaria and Macedonia. Methods (a) Review of existing laws; (b) Interviews, based on Questionnaire 1, with representatives of international, national and local NGOs dealing with energy efficiency and local government. Interviews, based on Questionnaire 2, with local authorities and employees of municipal institutions. Analyze and systematize the results gained from the interviews and materials reviewed; Analyze and systematize the results gained from the interviews and the materials reviewed Structure of the thesis Up to this point, I have clarified a few ideas. I have presented my motivation to research energy efficiency at a local level in Bulgaria and Macedonia. Next, I have described the aim and the specific objectives of this study. In this chapter, I have explained the methods that I used in this research and I have linked these methods with the objectives pursued. 10

21 In Chapter 3 I provide a review of the general concepts of energy efficiency, describe some common barriers to energy efficiency and examine the existing literature on policy instruments and strategies for overcoming these barriers. Since most problems encountered by municipalities in implementing energy efficiency projects are rooted in their limited powers and the lack of comprehensive control over their own finances, I discuss, in Charter 4, the theoretical functions of local governments and the effective constraints on local governments in Bulgaria and Macedonia. In Chapter 5, I review and analyze barriers to energy efficiency in Bulgaria at the macroeconomic and the local levels. Next, in Chapter 6, I study the experience of two Bulgarian municipalities known for their commitment to energy efficiency and make recommendations based on their experience for overcoming the existing barriers to energy efficiency in Bulgaria. In Chapter 7, I examine the major barriers to energy efficiency in Macedonia. Finally, in Chapter 8, I investigate the situation in one medium-sized Macedonian municipality with reference to energy issues. In the same chapter I also make recommendations for the improvement of conditions at national and local level that will facilitate the implementation of projects for energy efficiency in municipalities. 11

22 Chapter 3: Policy making for improvements in energy efficiency This chapter reviews general concepts of energy efficiency, describes some common barriers to energy efficiency and examines existing literature on policy instruments and strategies for overcoming these barriers Basic concepts of energy efficiency While energy efficiency is increasingly considered the key to decoupling of economic growth and the increase in energy consumption, there is little agreement on specific energy efficiency goals and the best ways to achieve them. The International Energy Agency (IEA) defines energy efficiency as the relationship between the output (service) of a device or a system and the energy put into it (IEA 1997, 83). Improved energy efficiency means doing more with equal or less energy input and without curtailing functions related to energy service (Lovins 1979). The concept sounds quite simple and straightforward, but understanding ways to achieve it in practice requires in-depth knowledge of key energy efficiency concepts, the elements and instruments of an effective energy policy, and how they should be integrated in effective strategies. Energy savings potential, energy prices and the concept of the efficiency gap are among the basic and most controversial concepts of energy efficiency. When discussing the potential for energy efficiency improvement, four categories may be distinguished: technical potential, economic potential, market potential and social potential (IEA 1997). Technical potential is the achievable savings resulting from the maximum energy efficiency improvements available at any given time, regardless of considerations of cost (IEA 1997). Different technical analyses, however, may result in major differences in the estimated energy efficiency potential. To avoid such inconsistencies when determining technical potential one should consider engineering calculations, demonstration tests, and 12

23 field results of actual programs with different groups of real utility consumers (Krause et al. 1995). Economic potential is the saving that can be achieved by optimizing costs and making the best overall use of resources. An in-depth economic analysis has a rather broad scope, including a wide variety of components related to (a) direct and indirect energy savings and penalties; (b) direct and indirect economic costs and benefits; (c) utility system and other indirect costs and benefits, and (d) economic feedback effects. The last category accounts for the so-called rebound or take-back effect, which represents the possibility of increase in the demand for energy service as a result of energy efficiency investments that are economically cost-effective and reduce consumer energy bills (Krause et al. 1995). Market potential reflects what is seen by individuals and organizations to be technically and financially viable. It comprises the savings that can be expected in practice. Finally, social potential takes externalities into consideration and includes multiple economic actors. Externalities are impacts, imposed by economic activity that are not reflected in its financial costs. Grubb (1991) observes that externalities are common in energy supply, ranging from local impacts of construction, mines, oil spills, gas explosions and other incidents, through the urban and regional impacts of air pollution, to the global issue of the greenhouse effect. Economic theory suggests that these costs should be internalized and incorporated into the energy price. Thus, social potential represents the saving that can be achieved as a net positive effect to the whole society (IEA 1997). This classification shows the difficulty of giving a universal definition of energy efficiency potential and the complex range of factors that influence the assessment of this potential. Regardless of the approach one adopts in evaluation of the potential for energy efficiency, it is always closely related to the issue of energy prices. In fact, energy prices represent a fundamental concern and a major criterion at all levels of decision-making in the 13

24 sphere of energy efficiency. The more comprehensively prices incorporate the full costs of producing energy and mitigating the environmental damage it generates (this last representing the externalities), the greater the potential for energy savings (IEA 1997). Prices distorted by subsidies do not reflect the true cost of energy and are considered to be one of the major barriers to energy efficiency improvements. This is why Laponche et al. (1997) suggest that the first stage of an energy efficiency strategy should be to look at how energy prices reflect economic costs and environmental and social external costs. For a better understanding of the mechanisms and driving forces behind the success or failure of energy efficiency actions, however, the review of energy efficiency should go beyond economic analysis. Eyre (1997) looks at major alternative approaches to energy efficiency behavioral, sociological and institutional. The behavioral approach to energy efficiency explores people as complex social beings rather than as mere utility maximizers. Social psychologists who have studied energy efficiency in the residential sector reveal that trust in the equipment supplier or contractor is often more important than financial analysis (Eyre 1997). The sociological approach reviews the complex network of actors at the point of consumption of energy land developers, financiers, builders, architects, subcontractors, landlords, tenants, professional and regulatory organizations every one of them with different interests and priorities (Eyre 1997). This approach is widely used when identifying barriers to energy efficiency improvements. The institutional approach emphasizes the role of regulatory and institutional structures of energy systems and the significance of the interactions between them. All these structures form an institutional framework, which may or may not support energy efficiency. Integrating these approaches with economic analysis provides a comprehensive framework for studying energy efficiency (Eyre 1997). The concept of the energy efficiency gap is discussed below, as an introduction to the review of the barriers to energy efficiency improvements. The rationale for this choice is that the gap is both a result of these barriers and a reflection of the factors that cause them. 14

25 3.2. Barriers to energy efficiency There is a broad range of literature concerning what have become known as barriers to energy efficiency. First, I consider the concept of the energy efficiency gap The energy efficiency gap According to Golove and Eto (1996, 6), the Solar Energy Research Institute (SERI 1981) defines the energy efficiency gap as the difference between levels of investment in energy efficiency that appear to be cost effective based on engineering and economic analysis and the lower levels actually occurring. The gap is frequently illustrated graphically by a supply curve of conserved energy (Golove and Eto 1996). Schipper et al. bring in the social element and develop further the concept of the energy efficiency gap. They define it as the difference between the average energy efficiency resulting in the market (in new equipment and buildings as well as in existing stocks) and the level of efficiency that would be economically beneficial from a societal point of view (Schipper et al. 1992, 305). The size of the gap between current efficiency levels and the economic optimum still remains a matter of debate. The estimates of the size of the energy efficiency gap are in a rather broad range: between 10 and 30 percent above the current efficiency levels might be cost-effective (Eyre 1997). Some authors challenge not only the size, but also the existence of the energy efficiency gap. Golove and Eto (1996) review a number of critiques of it. In general it might be assumed that the it is overestimated, because it does not consider the heterogeneity of consumers and the natural life cycle of any new technology. Another argument is that the energy efficiency gap is misconceived, because it does not account for important factors in 15

26 energy efficiency investments, such as risk, hidden costs and other non-economic variables, including psychological and societal considerations. The size of the gap is not critical, but what it implies is a misplacement of resources in the economy (Eyre 1997). This misplacement is a direct result of a number of barriers, including deeply rooted market imperfections Barriers to energy efficiency A range of market impediments inhibit the deployment of cost-effective efficiency opportunities. These are usually called barriers to energy efficiency. A good outline of major barriers to energy efficiency is provided by a study by OECD (1997) and presented in Table 2. As can be seen, this OECD study puts an emphasis on macroeconomic and microeconomic market barriers, but as well takes into consideration institutional, behavioral and informational obstacles. All these barriers are present to a certain extent in Bulgaria and Macedonia. A broad review of specific barriers to energy efficiency, together with a number of suggestions for overcoming these, is provided in Chapters 5 and 6 for Bulgaria, and Chapters 7 and 8 for Macedonia. Table 2. Major barriers to financing energy efficiency 1. Macro-economic (1) High inflation, unstable currency climate (2) Political and policy uncertainty (3) High incidence of debt, defaults, barter trading 2. Lack of information (4) General information on energy efficiency is poor (5) Lack of metering (6) No standard measurement protocol for measuring 16

27 savings (7) Lack of experience in business and risk management (8) Donors and project developers unaware of opportunities 3. Lack of credit history, credit-worthiness (9) Enterprises, municipalities and other borrowers have not yet developed credit history (10) Poor cash flow (11) Lack of collateral 4. Institutions/ownership (12) Historical legacy of central planning policies (13) State-owned energy monopolies (14) Split incentives for building tenants and owners: multi-ownership of buildings (15) Weak institutional frameworks 5. Energy prices (16) Low energy prices (17) Pricing uncertainties (18) Energy subsidies (19) Externalities not internalized 6. Small scale of the energy efficiency projects Source: OECD (1997) Some authors, such as Golove and Eto (1996), point out the deficiencies of using the concept of market barriers in the sense of features of the energy services market that are believed to inhibit investments in energy efficiency. They focus instead on neo-classical market failures and argue that most barriers can be understood as examples of the following market failures: (1) Externalities; (2) Imperfect competition; (3) Public goods; (4) Imperfect information. 17

28 While these failures describe rather extensively the market roots of most barriers to energy efficiency, they ignore, amongst other things, the institutional, regulatory, behavioral and sociological aspects of the way barriers function Policy tools for energy efficiency Some of the barriers outlined above can be addressed by a wide variety of policy tools and strategies. However, it is not clear what the collective impact of all policy measures might be, as no country has ever tried to apply the full range of available instruments (Grubb 1991). Nevertheless, policy makers should be familiar with these instruments so that they combine them to tailor energy efficiency strategies, which reflect the specific country context. An energy efficiency strategy is not just a slight adjustment to an energy policy. Rather, it is a new concept, which takes into account the costs of environmental degradation and seeks to bring about efficient national and international economies (Laponche et al. 1997). Laponche et al. define an energy efficiency strategy as a set of economic, industrial and energy policy orientations and actions designed to provide consumers with an optimal service at the lowest cost possible and without harming existing nature (Laponche et al. 1997, 19). However, as Golove and Eto (1996) argue, the desirability of such policies is largely dependent on the magnitude of the problem (or problems) they seek to address, their efficacy in fixing these problems, and the nature of their interactions with other public policy and social objectives. In this sense, an important issue to consider is that policy making in the energy sector as a whole, and when designing energy efficiency policies in particular, is both multi-faceted and context-dependent (Helm 2002). The role of the actors in policy making at a local level is discussed in Chapter 4. A framework for effective energy efficiency policies which incorporates all these concerns must, according to IEA (1997), have the following six essential elements : (a) Effective market structure; 18

29 (b) (c) (d) (e) (f) Market actors recognizing their best interest and acting on it; Focused market interest on energy efficiency; Access to good technology; Supportive institutional framework; Continuity. Most of these elements, however, are only partially present, or totally absent, in Bulgaria and Macedonia. While these are general guiding principles, specific policy tools should also be discussed. It is vital to understand the nature of these measures and the driving forces behind them. A number of good taxonomies exist (for example, Grubb 1991; Schipper et al. 1992; IEA 1997; Laponche et al. 1997) which present sets of policy measures related to (a) communication and information; (b) training; (c) regulatory instruments; (d) voluntary agreements; (e) financial incentives; and (f) demand-side management. The following overview of these six areas is based mainly on Laponche et al. (1997) and an IEA study of the same date (IEA 1997). Under (c) - regulatory instruments - I have inserted an excursus on pricing and subsidies Communication and information Action in this sphere has two objectives. On the one hand it should provide economic, technical, industrial, financial and commercial information to all decision-makers, economic agents, intermediate organizations and consumers, so that they can take an active and effective part in the implementation of energy efficiency programs. On the other hand it should heighten general awareness of the value of an energy efficiency policy (Laponche et al. 1997). 19

30 Training The aim of training is to transfer highly specialized skills, general knowledge and culture. It involves engineers, technicians, economists, architects, educators, staff from government departments, institutions and other organizations and funders (Laponche et al. 1997) Regulatory instruments Establishing rules and standards relating to energy consumption and monitoring their application are governmental tasks. Here standards and labels should be briefly explained, since they affect the market for energy efficient products in different ways. While standards set a minimum value for energy efficiency and ban appliances which consume too much energy from the market, labels inform consumers about the energy efficiency of a product and enable them to compare the various products which are available and to choose between them (Laponche et al. 1997). Regulation may also be applied to the construction industry and the transportation sector. Excursus on pricing The issue of accurate pricing should be raised again at this point. Governments should set a market framework such that energy prices reflect the full cost of supply, including distribution and external costs. Otherwise energy prices become a major barrier to the implementation of energy efficiency projects. Many countries, however, subsidize energy, whether directly, or indirectly, by such devices as cross-subsidies, whereby industrial and commercial consumers subsidize residential consumers by paying more for energy. There are various reasons for this policy, 20