CDIE

        Impact

              Evaluation


                           SAVING ENERGY 

                        IN THE CZECH REPUBLIC

                                  

After 40 years of communist political repression and a straitjacket of

  economic controls, the Czech Republic has broken free. USAID has

     played a key role in two major problems facing the country:

        inefficient energy use and high levels of pollution.


USAID projects demonstrated that energy conservation can


       Reduce wasteful and inefficient industrial energy use at relatively low cost


       Generate high rates of return for individual factories and the country


       Reduce pollution at relatively low cost


       Be effectively promoted by a nongovernmental organization


The projects also pointed up some areas of difficulty:


       An uncertain investment or business climate deters investments in energy conservation


       Price distortions harm energy efficiency


       A technical solution of better equipment is rarely enough; improved business planning,

        marketing, and finance are needed


       There is a need for a more effective strategy for test-marketing and disseminating new

        approaches to energy conservation


PN-ABS-546                                               1996, Number 2                                SUMMARY

The Czech "velvet revolution" of 1989 ended 40 years of communist rule and set the stage for major

democratic reforms. Along with dramatic political change came economic reforms heading the coun-

try away from central planning and toward a relatively open and free market.


Under communism, central planners decided what would be produced and how. For a new factory,

for example, planners would choose a site, pick a production process, select equipment, and deter-

mine the type of workers needed. Planners and factory managers made technical decisions only--they

did not worry about prices and markets. Market demand was not a concern; nor was the price of labor, machinery, energy, and raw materials. Planners believed society's problems were best solved by

cheap energy, cheap capital, and subsidized prices for major industrial inputs and essential consumer

goods. The environment was seen as a free input, with almost no attention to pollution and health-related effects. 


With the end of communism the economy shifted to international prices, and many Czech firms now

faced international competition. The move to a market-based economy was traumatic, particularly for

industries with old and inefficient equipment. Czech industry had some advantages--industrial quality

was good and workers were highly skilled and relatively low-cost. However, industrial energy requirements were extremely high, and industrial pollution was poisoning the population. 


The Czech Republic is situated in the "black triangle," one of the world's environmental hot spots.

Severe environmental degradation results from economic policies that promoted highly polluting

heavy industry, discouraged energy conservation, encouraged the use of dirty fuels, and had few con-

trols on industrial pollution. In fact, while the Czech people harbored a wide range of complaints

against the communist government, a universal rallying cry was the environment. They may not have

understood how economic theory relates energy efficiency to energy pricing and pollution, but they

did understand how poor environmental conditions affect their health and living conditions.

 

The overall USAID assistance program dealt with a number of problems in the transition from a centrally planned economy to a free market economy.* One of the biggest problems in the transition was

cheap energy. USAID confronted that problem with two projects. The Emergency Energy project

began in 1990 and was followed six months later by the Regional Energy Efficiency project. The

rationale for Agency assistance was economic: if the Czech economy could use energy more effi-

ciently, it could maintain economic momentum, advance economic restructuring, and deal with pollu-

tion problems. The projects provided consultants, training, energy audits, and energy conservation

equipment. They also provided support for a nongovernmental energy conservation organization

known by the acronym "SEVEn." All together, the projects invested approximately $500,000 in sup-

port of energy conservation at five industrial plants.

The projects demonstrated that energy conservation works. Companies that made energy investments

saw very high financial rates of return, averaging 122 percent. This represents financial costs and

benefits directly related to the company and the energy it saves. It excludes benefits flowing to the

economy as a whole (reduced pollution, increased taxes) and costs to the economy and USAID for

project management. Including these costs and benefits yields an economic rate of return for the economy as a whole of 50 percent--still a very good rate. SEVEn has played a major role in energy conservation. Being separate from the government and special interests, it has been able to press the government for policy reforms while serving as a matchmaker, bringing together industry and energy

service providers. In most other countries USAID has had only fair to poor results working with government energy organizations. Working with a nongovernmental organization might provide a model

worth following elsewhere.


Energy conservation is more than a technical or engineering issue of making energy-efficient equip-

ment available. Business decision-making is influenced by prices, markets, and incentives. Under

communism, Czech industry directed all attention at meeting production targets, not reducing costs.

Prices and incentives did not encourage energy efficiency or controls on pollution. Even now, with

communism gone and with nearly free markets, the old business culture survives in many firms.

Moreover, it has taken the government several years to shift most energy prices to international lev-

els. 


The government has stressed pollution control rather than energy conservation. Stiff regulations and

fines have forced factories to switch to cleaner fuels and improved burner combustion. Pollution con-

trol has done more than just cut down on pollution--it has discouraged wasteful and inefficient energy

consumption. 


A factor impeding widespread success of the USAID project was limited dissemination. The project

succeeded at the five demonstration factories and with SEVEn, but the energy conservation message

has been slow to spread throughout the country. The technology clearly works, but more needs to be

done to spread the word. 

CDIE STUDY


In September 1995, a four-person team assessed

two USAID energy conservation projects: the

November 1990 Emergency Energy project and

the May 1991 Regional Energy Efficiency pro-

ject. The team consisted of Joseph M. Lieberson,

team leader and economist with the Agency's

Center for Development Information and Evalua-

tion (CDIE); Matthew Addison, energy econo-

mist with Development Alternatives, Inc.; Frank

Hahn, energy engineer with Development Alter-

natives, Inc.; and Alberto Sabadell, environmen-

tal engineer with USAID's Global Bureau. 


This was one of six impact assessments on ener-

gy conservation carried out by CDIE. The other

countries in the series are Guatemala, Hungary,

Jamaica, Pakistan, and the Philippines. All of the

country evaluations examined the economic and

environmental impact of USAID projects by ex-

ploring the same four questions:


1.   Policy reform. What has been the impact

     of government energy policy, energy

     pricing decisions, environmental policy,

     and privatization?


2.   Technology transfer. Was the right tech-

     nology selected, was it adopted, and is it

     still being used?


3.   Education and awareness. How success-

     ful was the project at spreading the energy conservation message?


4.   Institution building. Were government

     and private sector institutions strengthened to the point where they could pro-

     mote energy conservation after USAID

     funding ended?


BACKGROUND


The Czech Republic is shifting to a free market

system and opening its economy to trade with

Western Europe. However the economy has a

major problem: it is excessively dependent on

energy. Compared with Western European coun-

tries, the Czech Republic requires nearly six

times more energy to produce a unit of gross do-

mestic product (GDP) (see figure 1). This is due

to inefficient energy production and transmis-

sion, use of antiquated and energy-wasteful capi-

tal equipment, and artificially low energy prices

that discourage conservation. In addition, high

energy use and dirty fuels generate air pollution

four to eight time higher than in Western Europe

(see figure 2). 


Project Rationale: 

Why Energy Conservation? 


After the fall of communism, Czechoslovakia

launched major economic reforms. But in late

1990, just as reforms were starting, the economy

faced a serious economic crisis because of dra-

matic changes in international energy markets.

Almost all oil and gas had been imported from the Soviet Union, and the Soviets were now cut-ting back on deliveries and shifting to hard-cur-

rency payments. With Iraq's invasion of Kuwait

and the cutoff of Iraqi and Kuwaiti oil, interna-

tional prices soared. Experts assumed oil prices

would remain at $31 a barrel (from a 1990

preinvasion low of $13) and possibly move

higher.


The new, democratically elected Czech govern-

ment was starting to reform and modernize the

economy, but higher oil prices and energy short-

ages could derail those efforts. Faced with

mounting financial and industrial problems, pres-

sure might arise to return to the old system of

state controls and allocations. USAID assistance

could help cushion the shock and even use the

energy crisis as a way to reform Czech industry

and encourage a market-based approach toward

development. 


The rationale for USAID assistance was eco-

nomic: a Czech economy using energy more efficiently would save foreign exchange, maintain

economic momentum, and then move forward on

economic restructuring. Energy conservation was

a means to help the economy--not an end in itself. 


USAID projects provided energy consul-

tants, energy audits, funds for energy con-

servation investments, and training for

Czech energy auditors who then helped

factories improve their energy efficiency.

The project also provided start-up funding

for an energy/environmental group known

by the acronym "SEVEn." A nongovern-

mental organization (NGO), SEVEn is

now highly successful and operating inde-

pendent of donor funding. SEVEn helped

spawn two private energy service compa-

nies that work as energy conservation con-

sultants. USAID projects supported energy

conservation demonstration investments in

five factories. The investments generally

went to low-cost, quick-payback measures

such as steam traps, steam valves, thermostats,

and energy-monitoring equipment.

 

PROGRAM ELEMENTS


Policy Reform

 

The era of cheap energy is coming to an end,

but the politics of ending it is difficult. Previ-

ously, the government set energy prices low to

encourage industrial production and to provide

cheap energy to households. Major reforms

started in 1989 with the end of communism, and

from 1989 to 1991 energy prices were raised

dramatically, moving close to world market lev-

els.


Since 1991, however, as the economy has

slipped into recession and political resolve has

softened, energy prices have lagged behind infla-

tion. Energy price increases were outweighed by

massive inflation. As a result, from 1989

through 1994 real energy prices (adjusted for

inflation) declined for most industrial fuels (see

figure 3). It was difficult to encourage energy

conservation and energy efficiency in industry

when energy prices were falling. More over,

during 1989-93, energy intensity increased--that

is, it now took more energy to produce a given 


level of output. Energy efficiency was slipping

because of two factors: 1) The economy was in

recession and factories were operating well be-

low capacity. This meant it was hard to maintain

energy efficiency. 2) With fuel prices becoming

relatively cheaper, there was no incentive to con-

serve energy use. Even with these problems, for

industry most energy prices are now moving

close to costs of production. Only the residential

sector still receives highly subsidized energy.

The government is hesitant to raise energy prices

to households, fearing political backlash.


Czech environmental policy has reduced pollu-

tion through regulation. New laws require major reductions in pollution by 1998 with reductions being phased in over several years. When

factories exceed emission limits they must pay

fines, and if they fail to meet the 1998 standards

they will be forced to shut down.


Factory managers are taking the regulations seri-

ously. The fines, and in particular the prospect

of having to close down production in 1998,

have provided them with a strong incentive to

clean up their smokestacks. The pollution policy

already is having an impact, with significant de-

clines in sulfur dioxide and nitrogen oxides emis-

sions (see figure 4). Factories and the national

electricity-generating company are switching

from coal to cleaner fuels, installing stack scrub-

bers, changing production processes, and

improving burners and boilers to reduce pollu-

tion. In addition to reducing pollution, this ap-

proach discourages wasteful energy consumption. 


Technology


Probably as important as the equipment were the

introduction of energy planning techniques and

training in ways to develop business and finan-

cial plans for energy conservation. The projects

demonstrated how a good financial and business

plan incorporates and ranks investments in a

manner understandable to company managers.

This approach enabled engineers and management to agree on investments that generated en-

ergy savings. 


Long known for its industrial excellence, the

Czech Republic is a country comfortable with

technology and innovation, and manufacturing

standards are high compared with those of other

ex-Soviet bloc countries. Under communism,

however, industry concentrated on production

and output, with less concern for costs, including

energy costs. There was little initiative to bring

innovative technologies to management. It was in

this environment that the USAID projects were

begun in 1991.


In many projects in other countries, USAID in-

troduces new technologies. That was not the case

in the Czech Republic. Most of the energy conservation hardware was known to Czech engineers. Changes initiated by the projects were

mainly in the use of existing technologies to

solve problems new to the Republic. 


The USAID projects took low-cost hardware and

software technologies and applied them to Czech

industries. Under communism, management had

little incentive to apply its knowledge to solving

energy efficiency or pollution problems. The

USAID projects demonstrated low-cost, quick-fix, off-the-shelf solutions that could meet the

needs of energy conservation. Principal hardware consisted of valves, thermostats, steam

traps, insulation, and lighting. Principal software

introduced was automatic controls, energy poli-

cies, planning techniques, and business plans and

know-how. 

Engineers were trained to prepare financial feasi-

bility studies management could understand.

Management was quick to realize that simple,

low-cost investments could save energy and re-

duce operating costs while having a positive en-

vironmental impact. The projects demonstrated

how a good financial and business plan incorpo-

rates and ranks investments in a manner that can

be understood by a company's managers. This

knowledge caused both engineers and manage-

ment to seek out and propose investments that

generated energy savings. Industrial managers

and lenders have been shown by demonstration

the benefits of energy co