SIH is preparing energy performance contracts
Author: Pavol Szalai | euractiv.sk
Ivan Lesay: New energy efficiency rules will create a massive market
The cherry picking has ended and public buildings will be comprehensively restored. This will be enabled by changes in debt reporting, which we were the first to advocate in the Union, says the head of Slovak Investment Holding.
Since January 2017, Ivan Lesay has been the CEO of Slovak Investment Holding (SIH), a state investment fund financed primarily from Eurofunds. In 2015-2017, he was State Secretary at the Finance Ministry (having been nominated for that post by the SMER political grouping). In that role, he initiated a change so that comprehensive energy saving measures for buildings would not be included in Eurostat's public debt reporting rules. This change was first transmitted to the Concept for the Development of Guaranteed Energy Services and then in the amendment to the Energy Efficiency Act, which were recently approved by the government.
Why do we need the Concept for the Development of Guaranteed Energy Services and the subsequent amendment to the Energy Efficiency Act? Why can't the market solve this issue by itself?
First of all, we should clarify what constitutes the 'market'. On the demand side there is the public sector. The offer is provided by energy service providers and advisers in this area, and also by financial institutions that engage in the purchase of receivables.
The changes were deemed essential from a public finance perspective. If energy efficiency investments are not to be reported as debt, as permitted by the new Eurostat rules, contracts between public building managers and energy service providers must fulfil essential criteria. The risk must be clearly divided.
It was in the government's interest to do it correctly. If we had left it to public sector entities, which often lack what might be called financial literacy, contracts could be concluded incorrectly. And should, by chance, a Eurostat check take place, then it might turn out that, hypothetically, half of the contracts concluded do not fulfil Eurostat's requirements.
You have not mentioned energy efficiency as a priority. Should the concept and law not be viewed as an impetus for energy efficiency measures to be adopted in the market as a whole, and particularly in public buildings?
It is true that our attitude may appear to be too narrowly focused on public finances. We have focused on one barrier, the removal of which will create a massive market. This will result in increased energy efficiency in public buildings.
The main barrier in question was the administration of private investments in public buildings, not only in Slovakia, but throughout the EU. Prior to Eurostat's decision, all public building renovation investment was classified as public debt. That is to say, it was considered as state borrowing. And due to the fact that such activity is limited by the Maastricht criteria, the state did not want to borrow, or could not.
If this is done correctly, public debt and deficit will not increase. The investment will be repaid from what is saved. Stated more simply, public sector deficit will remain unchanged and there will be no impact at all on debt.
How long will it take to pay off investments in buildings?
It depends on the condition of the building. Comprehensive renewal, a prerequisite for Eurostat and the European Commission, means more than simple technology exchange and involves retrofitting works. The minimum contract duration is eight years, and will normally last 10-15 years. It can last up to 20 years for dilapidated buildings.
What does comprehensive renovation mean?
Energy performance contracting (EPC) in Slovakia in the past were done by technology companies. They would exchange energy intensive boilers through leasing arrangements, and thus without affecting public finances. This was an issue of cherry picking. These companies had no interest in investing in roofs or windows for 15 years, but only to replace boilers or other items with high returns.
However, the European Commission considers comprehensive renovation to be a priority. Buildings need to be viewed in the long term perspective and restored in one package. Sometimes it may be the case that a boiler is changed, later on thermal insulation grants are found and at that point the large boiler becomes superfluous. Investment incentives should not be geared to the short-term profits of energy efficiency service providers.
Do you expect the new rules to make it easier for companies to take on the financial burden of investing?
We have focused on removing the public sector barrier. The private sector does not have a regulatory barrier. Of course there is the question of how to finance renovation. Companies would have to be in very robust financial health to finance this from their own resources and then maintain their assets there for 15 years. Therefore, it is important that companies can sell the claim after a year to a third party. Our goal is for companies to revolve the capital in the economy.
So are we talking about the overall encouragement of 'green finance' in Slovakia?
Of course. We have been in a vanguard position in the European Union regarding the changes instituted by Eurostat. Also thanks to us, this huge change has been achieved on a pan-European level.
Critical voices say that the Eurostat rules are limited to saving energy. They do not allow for the inclusion of energy measures that bring about savings in operating and wage costs.
It is good that these rules are limited to energy savings. This is a business model. I can imagine that savings are also possible elsewhere, for example, in the area of building management if, for example, the number of people responsible for operating a boiler after its renovation has been reduced. But this is what Eurostat has decided to do. We have no impact in this regard. We are only trying to translate the new rules into our concept, legislation and model contract, which is still being prepared.
Also I agree with Eurostat. Otherwise, it would not be standardized, there could be a problem with demonstrating compliance. Energy saving is much more difficult to handle. Companies might not want to get involved. I can't understand the basis of this criticism.
It comes from the Director of Energy Services Center Marcel Lauko. He asks whether it makes sense to come up with new rules when we have a new directive on the energy performance of buildings. Slovakia will implement it in the coming months, or years, at the most. It is this directive that goes beyond energy savings towards an overall building environment with a corresponding impact on health.
In this matter we are rather more policy-takers than policy-makers. We are rather glad that at least Eurostat changed its approach to debt reporting. One aspect is the policy of the European Commission and the Member States, the second aspect is the involvement of the private sector. I can illustrate this with an exaggerated case: for example, the state could say that all reconstruction of buildings must result in zero energy consumption. But the private sector can contribute to this only to an extent; the state has to subsidize the rest. Companies consider energy efficiency as a business. If people's productivity and other parameters improve, we will support this, but we need to find another model to deal with this, such as subsidies.
Will public administration have the expertise to handle complicated public procurement processes connected with energy savings?
It will not be easy. However, the joint working group of Finance Ministry and SIH is working on a model to make it easier. It will consist of a clear, methodical approach and a model contract. Also a one-stop contact point will be created at the Slovak Innovation and Energy Agency.
In the first phase, the building manager will contract an energy consultant. He will make an assessment of possible savings on the building and prepare the groundwork for public procurement. All this documentation will cost several thousand euros, or tens of thousands for larger buildings. If the manager has the money, he will succeed. In the second phase, the manager will, based on the documentation, procure an energy savings provider. Companies will offer bids to make more savings at a lower price. The company is then responsible for the entire project. It's not going to be problem-free, but certainly easier than today. As it is a developing market, there will be some learning troubles in the early stages.
When do you expect the first such measures to be launched?
All necessary amendments to the laws should gain parliamentary approval by the end of the year. We hope that Eurostat will approve our methodology and model contract by the beginning of next year. Then public procurements can begin. However, even at this stage, public administration can prepare documents. Some student halls of residence are already working on it.
Did the politicization of the renovation of student halls of residence help you?
Yes and no. On the one hand, we are grateful that it has drawn the attention of politicians, officials, buildings managers, and the market to the advantageous possibility of investing in guaranteed energy services. Also it is positive that the funds allocated for the renovation of university halls of residence should also be used for energy audits, the public procurement of service providers and thus for the overall preparation of these projects.
On the other hand, the timing was not ideal. At the beginning of the year, we were still preparing a regulatory environment. There were also voices that interpreted the preparation of the regulatory environment as an attempt to slow down the drawdown of funds allocated to universities. That was definitely not the case; we were just trying to make first-rate investments.