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Good practice examples > Hungary > Hungary Energy Efficiency Co-Finance Program (HEECP phase1, 2) and Commercializing Energy Efficiency Finance progra, (CEEF) program
Hungary Energy Efficiency Co-Finance Program (HEECP phase1, 2) and Commercializing Energy Efficiency Finance progra, (CEEF) program
January 27, 2015
Name of GP initiative

Hungary Energy Efficiency Co-Finance Program (HEECP phase1, 2) and Commercializing Energy Efficiency Finance progra, (CEEF) program

Number of GP initiative HU05
Region/country

Hungary (HEECP +CEEF )- (Central Europe and Baltic States- CEEF)

Author/Email Maria Beatriz Rosell/Mrosell@rec.org
Institution

Regional Environmental Center for Central and Eastern Europe

Year of implementation: 1997- 2008 (HEECP 1: 1997-2001, HEECP 2: 2001- 2005, CEEF 2003-2008)
Time horizon of initiative/map/etc.: development and adoption of cleaner energy solutions, using less resource intensive paths.

General description:

The energy efficiency market covers a variety of measures to be implemented by a diverse range of end-user sectors, end-use equipment and technologies and large number of small and sometimes isolated projects, with a dispersed range of decision makers. If properly financed, EE technology projects are proven to be beneficial as investment costs are paid back over short periods from energy cost savings. However, projects with compelling economic returns remain unimplemented. The major causes for this gap is the lack of EE finance and lack of delivery mechanisms that suit the specifics of EE projects, and sometimes the lack of pipelines of bankable EE projects (JRC, 2010). Another cause is that the initial expenditure for new equipment is often large for most of building owners and energy consumers. In order to address the lack of EE financing instruments, the Hungarian Energy Efficiency Co-Finance Program (HEECP) and the Commercializing Energy Efficiency Finance programm (CEEF) were initiatives that demonstrated the success of a risk-sharing model using a partial risk guarantee fund. These are internationally recognised examples (HEECP and CEEF) of EE loan guarantee programmes and technical assistance for financial institutions (FIs); the Global Environmental Facility (GEF) and the International Finance Corporation (IFC) put efforts to transform markets and project financing for investments on EE in countries with an economy in transition like Central Eastern European countries and the Baltics States.

The first phase of this programme (HEECP-1) provided finance and advisory services to eligible financial institutions in Hungary for financing EE projects. The objective of HEECP was to reduce the credit risk and transaction costs of EE financing. Similarly to HEECP-1, the HEECP-2 aimed at facilitating guarantees for private companies which worked on the implementation of project on EE. In 2003, the CEEF was launched for Central Eastern European and Baltic States (Czech Republic, Slovakia, Lithuania, Latvia and Estonia). In 2005, the HEECP was merged into CEEF due to the success of HEECP and achieved goals to be replicated in the CEEF countries. Besides the HEECP 1-2 objectives, the complementary goals of CEEF were to develop finacing structures to be later offered to other developing countries, up scale business, and increase awareness raising and capacities of FIs on EE market activities.

During the third phase of the program (CEEF), Hungary was the country leading most of the project activities (74.7%) mainly focusing on: cogeneration, street lighting, municipal energy services companies, district heating, EE equipment finance and housing (renovation types: façade wall, rooftop and basement insulation, window replacement, heat distribution network up-grades, pipes, radiators). The Czech Republic and Slovakia also achieved good results from the CEEF. On the contrary, results in Latvia and Lithuania were not overly positive, as the IFC country offices’ staff had limited capacities on the topic. In the case of Estonia, it only formed part of the countries where the replicability was studied but the because of the lack of interest from Estonian FIs on EE projects the programme was not further developed. Because of the positive results of HEECP and CEEF in Hungary, this good practice example mainly focuses on this country, while other project outputs of CEEF in the rest of the programme area are briefly mentioned.

In the course of the three phases of HEECP and CEEF a commercial lending sector was built in Hungary, in partnership with financial institutions, utility companies, EE supplies and energy management companies. The ultimate goal of these programmes was to make EE financing possible, to provide a useful platform for delivering a broad package of assistance to FIs, allowing energy consumers to access to loans and support energy saving modernisation. By this means, reduce GHG emissions and support the creation of a sustainable market in Hungary and other CEEF countries. It is important to highlight that the building sector is responsible for 40% of energy consumed and 36% of greenhouse gas (GHG) emissions in Europe (EC- DG Energy, 2014).

The HEECP was designed in two phases; the first phase (HEECP-1) consisted of a USD 5.7 M pilot project financed by the GEF, generating interest of Hungarian financial institutions in the EE market. The second phase (HEECP-2) comprised the expansion of guarantees and technical assistance supporting EE financing in various projects, IFC contributed with USD 12 Million (M) and GEF with USD 4M. The CEEF was financially supported by IFC with USD 75M and by GEF with USD 15M. The guarantee programme under CEEF consisted in the following: up to 50% IFC partial credit guarantees for investing in EE through the selected FIs and also the offer of various guarantee products; individual and portfolio guarantees*. The technical assistance programme of CEEF comprised direct financial support for project developers, awareness raising and training of FIs, along with the financial project support and sharing international best practices. The results of HEECP 1-2 were: the successful involvement of 2 banks in Hungary; more than 500 small transactions by 2006; the first ESCO-type large scale investment completed; and projects developed with district heating companies participation. Also the renovations financed consisted of: window replacements, heat distributions network up-grade, metering and control devices, heat exchangers, staircase lighting and elevator engine up-grades carried out. The results of CEEF were: the participation of 14 partner banks; more than 600 transactions completed; 700 projects financed (600 blockhouse projects); EUR 166M invested in EE; EUR 93M invested in housing (aboved mentioned renovation type) and the estimated reduction of CO2 emissions of 145 700 tons per year. Image 1 illustrates the structure of the HEECP -1 2 (GEF report, 2012/ originally from Tayloret al., 2008). Image 2 shows how the scheme of CEEF (Kludovacz, 2008).

    

Steps in creating the initiative/roadmap/strategy:

For a long time EE projects remained unimplemented because of the lack of investment delivery mechanisms suitable in the national and local economic context of countries. The traditional investment delivery mechanisms implemented by local banks was important for the development of EE business, however, by 1997 there was a potential for improvements on energy saving in Hungary to benefit energy consumers by the creation of innovative financial instruments. Hungary as well as other CEEF countries used to operate under a centralised planned economy, also the infrastructure and financial institutions were based on low and subsidised energy prices. Besides this, there were no economic incentives to introduce EE nor experience in the countries to offer energy efficiency loans.

In the late 90’s the country’s financial sector started to change, banks were operating on a commercial basis and these institutions were starting to finance EE for small and medium sized enterprises (SMEs). This is when it seemed pertinent to start a project on EE co-financing, therefore, in 1997 the GEF started building the basic capacities and knowledge on this topic. The IFC was responsible for the project implementation, supporting EE with advisory services operations and then the partnership expanded with the including these stakeholders: commercial banks, utility companies, energy efficiency supplies and energy management companies. The HEECP partial loan guarantee was opened to companies and institutions which were able to implement EE projects, and as the programme gained popularity, the preferred loan recipients were project developers, for examples, leasing companies, energy services companies (ESCOs), SMEs and vendors. These type of organizations were the ones to integrate small projects into larger ones and the stakeholders to build upon the provided training and technical assistance (Taylor, 2008).

Because of the success of the HEECP 1-2, in 2005 the HEECP was merged into the CEEF (programme created in 2003), unifying it as one regional EE programe. During the CEEF, Hungary carried out most of the project activities; Hungary (74.7%, aboved mentioned); Czech Republic (19.5%) with actions mostly dedicated to use of renewables; Slovakia (4.5%) focusing in use of renewables and improvement of district heating; Latvia (0.8%) and Lithuania (0.4%) concentrated in housing (type of renovation aboved mentioned), while Estonia was only part of the countries where the potential introduction of the measure was studied. The CEEF succesfully finalised in December 2008, and among the challengues to be addressed for future initiatives the following can be mentioned: maximasing EE with more complex reconstructions and renovations, making generated energy savings part of the revenues available for debt service, and the replication of in other markets (Kludovacz, 2008). After the end of CEEF, Hungary and the Czech Republic continue financing EE projects without the aid of IFC guarantees. Concerning replicability of the programme, in 2012 it was reported by the IEA that the CEEF model (risk-sharing programme) was adapted in Russia, China, Vietnam and the Philippines.

Targets and target determination:

The estimated GHG emission reduction during the project period (1997-2005) was approximately 2.6 Mt Co2. Besides the afore mentioned results, the outcomes of the HEECP and CEEF were the following (GEF, 2012):

  • Reductions in capital costs for new electric transmission and distribution systems due to reductions in demand
  • Decreases in the country’s reliance on imported energy due to reduction in the use of oil and natural gas
  • Improvements in living standards, increase the competitiveness of SMEs, municipal budgets due to reductions in energy costs.

Success factors/barriers:

(+)Business potential (development of market niche), demand and local availability of technology (also inexpensive) were enabling conditions

(+)The continuous and strong cooperation with trustworthy FIs. During HEECP1-2 market experience and understanding of market dynamics were enhanced which led to concrete and positive results to be replicated in CEEF. Also the standardised portfolio products (individual and portfolio guarantees) were key factors.

(+)Favourable legal environment; block houses with legal status

(+)Constricted schedule for EU accession countries to comply with energy price rationalisation and climate/emission reduction targets

(+)As it was a State grant program, the initiative counted with high political visibility

(-)Lack of human capacities of IFC country offices’ staff in the Baltic States

(-) Lack of interest of Estonian FIs in EE projects as by 2003 the EE market was in a more advanced stage than in the rest of CEEF countries.

Implementation costs:

HEECP I: GEF contribution USD 5.7 Million (M). HEECP II: USD 16M (USD 12 M from IFC and USD 4 M from GEF). CEEF: total of USD 90M (GEF contribution USD 15M and IFC USD 75M).

Economic effects:

not analysed.

Links:

*Individual guarantees: guarantees based on a single loan made by a partner lending institution to a single borrower whose identity is known. In an individual guarantee scheme such as in the HEECP the guarantor is heavily involved in each individual transaction, appraising the eligibility of the applicant borrower for the guarantee in parallel with the primary lender's due diligence to establish eligibility for a loan. Portfolio guarantees: they guarantee all loans by the primary lender to a class of borrowers.
This document was developed in the framework of the LOCSEE project.
European Union SEE Regional Policy Network collaboration area (members only) Regional Policy Network