Energy efficiency law and its problems

The law regulating energy efficiency was initially introduced in 2009 and modified since then 19 times to make the ideal law for effective energy spending. With approximately 5% of Russia’s annual budget spent on the energy needs of public buildings, it’s quite logical that the government eventually decided to introduce such a law, but the key problems with energy efficiency stimulation in the country remain the same.

What are those problems?

First of all, the law states that every public entity must develop an energy efficiency program and reduce its energy consumption by 15% from a 2009 baseline, over the next 5 years, by no less than 3% annually. It’s that simple, one rate for all. Does the law take into account a building’s condition? Current energy efficiency class? Perhaps there is some sort of white certificate system or quota trading introduced? The answer to all these questions is no.

But it doesn’t stop here. Another major flaw with this law is the lack of financial incentive for those embracing energy efficient solutions in their facilities. The existing legislation is pretty much about command and control and doesn’t emphasize economic incentives. The latter incentives are limited to a three year tax exemption on property tax for energy efficient buildings, government loan guarantees (with very restrictive terms, e.g. demanded payback period of no more than 5 years), and the opportunity to use 3% of the total energy saved that exceeds the required 15% for increasing the wage fund. What about tariff incentives? A thought-through tax stimulation system? Tailored credit products? Once again, Russia has decided to adopt a stick rather than carrot approach.

The absence of some important procedures leads to rather frustrating outcomes. Among them stands out the perfunctory compliance with the law.

To illustrate it with a practical case, I’ll describe some key points of the energy efficiency program at a Russian university. To comply with the numerous nondisclosures that I signed while writing my thesis on the issue, we shall name it University X.

University X is a typical northern Russian university with average consumption patterns. HVAC accounts for roughly half of its utility bills, electricity use accounts for a third, followed by water consumption at about 15%.

University X now has a 20-paged, $1 million ‘Energy Efficiency Program 2012-2016’, generating savings of around $130,000 over the course of 5 years.

What happens if we take a closer look at the program? We see a standard set of tools to increase energy efficiency, e.g. insulation, window and light bulb replacement, motion sensor installation. How then was the effect calculated? Well, it wasn’t. The resulting annual savings generated by all the measures suggested turned out to be the exact 3% required by law. Were thermal characteristics of the buildings, or their energy efficiency class, taken into account when calculating? Hardly.

Moving on to financial estimates, that represent (according to all the existing standards of energy audit, be it a walkthrough or a comprehensive audit), a very important part of the program, we notice that they occupy one page. Do we see NPV, payback period, ROI calculation? Adjustment of the flows for inflation and other factors? The answer is, again, no. Even the principle of savings accumulating over the lifetime of every unit installed was not taken into account.

What are the reasons for such omissions?

There might be many. Among them, I’ll highlight the following:There are hardly any incentives for public entities in Russia to increase their energy efficiency. They get funding from the state anyways. As a consequence, very few of them have staff responsible for energy consumption.
For detailed and precise calculations, high quality raw data is crucial. Energy management and monitoring mechanisms have to be implemented. When I approached the expenditure accounting section chief to ask for the data on energy consumption, I received a rather shocking answer: “There’s not much, really, here’s our three years consumption in an Excel spreadsheet. In fact, we only have it because I was curious and decided to see how much we spend on electricity”.
The case of University X is not unique. When energy efficiency legislation came into force, with a set of quantitative goals to achieve and a lack of instruments and instructions on how to achieve them, thousands of public entities resorted to the tool that is usually wielded in these types of situations in Russia: turning legal gaps in their favor. If the only thing that’s controlled is the existence and not the quality of energy efficiency program, if enforcement mechanisms are not properly established, if there’s no economic incentive for you to save energy, then the actual contents of your energy program rank quite low on your list of priorities.

A new law is to be introduced soon and we are looking forward to some major improvements. Without these major improvements, an energy efficient economy will remain a pipedream.