The energy performance contract model can turn building renovation into a truly popular policy objective among politicians in Central and Eastern Europe because it can be done without any use of public money and has no impact on public debt, says Ivan Lesay.
Ivan Lesay is the CEO of Slovak Investment Holding, a subsidiary of the Slovak Guarantee and Development Bank (SZRB), which provides financing through financial instruments for infrastructure, energy efficiency, waste management, social economy and SMEs. In the years 2015–2017, Lesay served as State Secretary in the Finance Ministry of the Slovak Republic.
Lesay spoke to EURACTIV.cz at the Central & Eastern European Energy Efficiency Forum in Serock, Poland.
Energy efficiency is often mentioned as a good area for using so-called financial instruments in the EU budget. Is this also perceived as an opportunity at the political level?
I think the politicians have learned a while ago that in some areas, financial instruments are more appropriate than grants and energy efficiency is one of them.
At the same time, there are still grant allocations for this investment area and since the Commission is making a combination of grants and financial instruments quite difficult, it is not always possible to avoid a competition between these two types of investment instruments.
What has been the experience with the use of financial instruments for energy efficiency-related investments in Slovakia? Which sectors are suitable for that and what are the next steps?
We are currently preparing a financial instrument to support energy efficiency in residential buildings. We are also preparing an investment framework in the country to implement energy performance contracts.
This is an innovative type of instruments, in which a private Energy Service Company (ESCO) implements and finances an energy efficiency investment in a public building. The ESCO guarantees a certain level of energy savings, through which the investment is subsequently repaid over the next 10 or 20 years. The essential principle is that project risks remain with ESCO, so that if the guaranteed energy savings are not achieved, public building pays less or not at all.
We believe that the energy performance contract model has the potential to make energy efficiency a truly popular policy objective among politicians and public authorities in Central and Eastern Europe. It is a policy tool through which growth, jobs and social benefits can be achieved and it can be done without any use of public money and any impact on public debt.
I understand this shift came with the new Eurostat rules on the statistical treatment of energy performance contracts which should help public authorities with the renovation of their buildings.
Yes, the major limitation has been the public budget. The Maastricht criteria and austerity made it quite difficult for public buildings – or those in charge of them – to become indebted.
But this will change now with the new Eurostat rules. Before, even private money invested into renovations of public buildings was inputted to public debt because of third-party liability. So Eurostat classified the cost of investment – even if it came from private sources – as public debt.
That was impeding movement on any front in this market. Now, if the project risks, such as not achieving the guaranteed savings, stay with the private company the investment cost does not increase public debt – a similar concept to a Private Finance Initiative (PFI).
I believe this will be a massive positive change. We are very much promoting it and there is really a market in the making. There are approximately 15,000 public buildings in Slovakia, most of them not in a very good state. Some of the buildings have already been renovated but sometimes even those were not done well.
You said you were preparing an investment framework for energy performance contracts in public buildings. What are the key elements of such a framework?
This process includes some limited legislative changes to ensure an off-balance statistical treatment of these investments, standardised contract, as well as a financial instrument to support the development of this market sector.
We are also preparing a methodological step by step guide for public buildings and ESCOs. First, the building manager pays for an energy auditor or advisor to scan a building and say “this is the energy savings potential”. Next, this auditor will prepare a public procurement for an ESCO company. Then the winning ESCO prepares the project documentation and constructs and maintains the energy efficiency renovation.
If it is all done properly, it cannot go south for the public sector and we believe this is going to be the case. We intend to have this regulatory environment in place by the end of the year and then the Slovak market will potentially be worth €2 billion.
Are there any financial instruments that can mitigate residual risks?
Not yet because this is a market in the making. We have yet to see what the market and the ESCOs need most. We may provide guarantees to commercial banks so that they can provide loans to ESCOs. We are in touch with infrastructure equity funds from outside Slovakia and they may be interested in bigger chunks of buildings – not on an individual basis, building by building, but more resembling a Public Private Partnership (PPP). In this case, a mezzanine financing could be helpful. Still, some ESCO companies may even need equity funding. So there are several options we are working with right now.
But another important part of the story is the so-called factoring. Once the ESCO company has carried out a renovation, they do not want to keep those assets on their balance sheets and they will use the factoring model to sell these assets to banks and free up fresh cash for new projects.
So it is not only about financing the ESCO to do the renovation but also buying out the assets from the ESCOs so they do not have them on their balance sheets. If they keep everything on their balance sheet, they really need a lot of capital or it cannot be done.