Report for development of the ESCO market in the EU enlargement and neighbouring countries : review of Albania, Bosnia and Herzegovina, Kosovo, Moldova, Montenegro, Serbia, the former Yugoslav Republic of Macedonia, Turkey, Ukraine, Belarus and Russia.
Date: 2018-11-16
Institutions: Joint Research Centre
Subjects: Albania, Belarus, Bosnia and Herzegovina, Kosovo, Moldova, Montenegro, North Macedonia, Russia, Serbia, Türkiye, Ukraine, energy consumption, energy industry, energy policy, energy saving, energy supply, financial instrument, provision of services, research report

Report for Development of the 
ESCO Market in the EU 
Enlargement and Neighbouring 
Countries 

Review of Albania, Bosnia and 

Herzegovina, Kosovo, Moldova, 

Montenegro, Serbia, the former 

Yugoslav Republic of Macedonia, 
Turkey, Ukraine, Belarus and Russia 

Panev, S., Bertoldi, P., 

Boza-Kiss, B., Palermo, V. 

2018 

 
 
 
This publication is a Science for Policy report by the Joint Research Centre (JRC), the European Commission’s 
science and knowledge service. It aims to provide evidence-based scientific support to the European 
policymaking process. The scientific output expressed does not imply a policy position of the European 
Commission. Neither the European Commission nor any person acting on behalf of the Commission is 
responsible for the use that might be made of this publication. 

Contact information  
Name:   Paolo Bertoldi 
Address: Joint Research Centre, Via Enrico Fermi 2749, TP 450, 21027 Ispra (VA), Italy 
Email:   paolo.bertoldi@ec.europa.eu 
+39 0332 78 9299 
Tel.: 

EU Science Hub 
https://ec.europa.eu/jrc 

JRC104394 

EUR 28405 EN 

PDF 

ISBN 978-92-79-64960-8 

ISSN 1831-9424 

doi:10.2760/36626 

Luxembourg: Publications Office of the European Union, 2018 

© European Union, 2018 

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How to cite this report: Panev, S., Bertoldi, P., Boza-Kiss, B., Palermo, V.,  Report for Development of the ESCO 
Market in the EU Enlargement and Neighbouring Countries, EUR 28405 EN, Publications Office of the European 
Union, Luxembourg, 2018, 978-92-79-64960-8, doi:10.2760/36626, JRC104394. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contents 

Abstract ............................................................................................................... 1 

Acknowledgements ................................................................................................ 2 

Executive summary ............................................................................................... 3 

1  Introduction ...................................................................................................... 4 

2  Status of the national ESCO markets .................................................................... 5 

2.1  Legal framework for ESCO ............................................................................ 7 

2.2  SERBIA ...................................................................................................... 7 

2.3  MONTENEGRO ............................................................................................. 7 

2.4  FORMER YUGOSLAV REPUBLIC OF MACEDONIA ............................................... 8 

2.5  ALBANIA ..................................................................................................... 8 

2.6  KOSOVO ..................................................................................................... 8 

2.7  MOLDOVA ................................................................................................... 8 

2.8  UKRAINE .................................................................................................... 9 

2.9  TURKEY ...................................................................................................... 9 

3  Barriers to the ESCO industry ............................................................................ 10 

3.1  Legal barriers ............................................................................................ 10 

3.2  Financial barriers ....................................................................................... 11 

3.3  Other barriers for the development of the ESCO markets ................................ 13 

4  Recommendation and success factors ................................................................ 14 

4.1  Political commitment .................................................................................. 14 

4.2  Supportive EE and ESCO legal framework ..................................................... 15 

4.3  Creation of an energy efficiency fund ........................................................... 15 

4.3.1  Creation of energy efficiency funds (EEF), financing barriers and 
implementation options. ............................................................................... 15 

4.4  Establishment of ESCO associations ............................................................. 17 

4.5  Development of guidelines, standard procurement procedures and EPC model 
contracts for the public sector ........................................................................... 17 

4.6  Monitoring and measurement of energy consumption ..................................... 17 

4.7  Development of a system for the measurement and verification of energy savings 
 ............................................................................................................... 18 

4.8  Capacity building for energy efficiency and ESCO ........................................... 18 

4.9  Promotion of energy services, the ESCO model and ESCOs ............................. 19 

5  ESCO in the public sector and tertiary sector ....................................................... 20 

6  ESCOs in the residential sector .......................................................................... 24 

7  ESCOs in the industrial sector ........................................................................... 27 

8  References ...................................................................................................... 29 

9  Development of the ESCO Market in Albania in 2015 ............................................ 30 

i 

 
 
9.1  General overview of the market ................................................................... 30 

9.2  Legal framework ........................................................................................ 30 

9.3  Barriers to the development of the energy service market .............................. 30 

9.4  Recommendations to overcome the existing barriers ...................................... 31 

9.5  Energy services in the public sector ............................................................. 31 

9.6  Energy services in the residential sector ....................................................... 32 

9.7  Energy services in the industrial sector ......................................................... 33 

9.8  Conclusions ............................................................................................... 33 

9.9  References ................................................................................................ 33 

10 Development of the ESCO Market in Bosnia and Herzegovina in 2015 .................... 34 

10.1 

10.2 

10.3 

10.4 

10.5 

10.6 

10.7 

10.8 

10.9 

General overview of the market ............................................................. 34 

Legal framework .................................................................................. 34 

Barriers for the development of the energy service market ....................... 34 

Recommendations to overcome the existing barriers ................................ 35 

Energy services in the public sector........................................................ 35 

Energy services in the residential sector ................................................. 36 

Energy services in the industrial sector ................................................... 36 

Conclusions ......................................................................................... 36 

References .......................................................................................... 36 

11 Development of the ESCO Market in Kosovo in 2015 ............................................ 37 

11.1 

11.2 

11.3 

11.4 

11.5 

11.6 

11.7 

11.8 

11.9 

General overview of the market ............................................................. 37 

Legal framework .................................................................................. 37 

Barriers to the development of the energy service market ........................ 38 

Recommendations to overcome the existing barriers ................................ 38 

Energy services in the public sector........................................................ 39 

Energy services in the residential sector ................................................. 40 

Energy services in the industrial sector ................................................... 41 

Conclusions ......................................................................................... 41 

References .......................................................................................... 41 

12 Development of the ESCO Market in Moldova in 2015 .......................................... 43 

12.1 

12.2 

12.3 

12.4 

12.5 

12.6 

12.7 

12.8 

General overview of the market ............................................................. 43 

Legal framework .................................................................................. 43 

Barriers to the development of the energy service market ........................ 43 

Recommendations to overcome the existing barriers ................................ 44 

Energy services in the public and commercial sector ................................ 44 

Energy services in the residential sector ................................................. 45 

Energy services in the industrial sector ................................................... 45 

Conclusions ......................................................................................... 45 

ii 

 
12.9 

References .......................................................................................... 46 

13 Development of the ESCO Market in Montenegro in 2015 ..................................... 47 

13.1 

13.2 

13.3 

13.4 

13.5 

13.6 

13.7 

13.8 

13.9 

General overview of the market ............................................................. 47 

Legal framework .................................................................................. 47 

Barriers to the development of the energy service market: ....................... 48 

Recommendations to overcome the existing barriers ................................ 48 

Energy services in the public sector and commercial sector ....................... 49 

Energy services in the residential sector ................................................. 50 

Energy services in the industrial sector ................................................... 50 

Conclusions ......................................................................................... 51 

References .......................................................................................... 51 

14 Development of the ESCO Market in Serbia in 2015 ............................................. 52 

14.1 

14.2 

14.3 

14.4 

14.5 

14.6 

14.7 

14.8 

14.9 

General overview of the market ............................................................. 52 

Legal framework .................................................................................. 52 

Barriers to the development of the energy service market: ....................... 53 

Recommendations to overcome the existing barriers ................................ 53 

Energy services in the public sector........................................................ 54 

Energy services in the residential sector ................................................. 55 

Energy services in the industrial sector ................................................... 55 

Conclusions ......................................................................................... 55 

References .......................................................................................... 56 

15 Development of the ESCO Market in the former Yugoslav Republic of Macedonia in 
2015 .................................................................................................................. 57 

15.1 

15.2 

15.3 

15.4 

15.5 

15.6 

15.7 

15.8 

15.9 

General overview of the market ............................................................. 57 

Legal framework .................................................................................. 57 

Barriers to the development of the energy service market ........................ 57 

Recommendations to overcome the existing barriers ................................ 58 

Energy services in the public sector........................................................ 58 

Energy services in the residential sector ................................................. 60 

Energy services in the industrial sector ................................................... 60 

Conclusions ......................................................................................... 61 

References .......................................................................................... 61 

16 Development of the ESCO Market in Turkey in 2015 ............................................ 62 

16.1 

16.2 

16.3 

16.4 

16.5 

16.6 

General overview of the market ............................................................. 62 

Legal framework .................................................................................. 62 

Barriers to the development of the energy service market ........................ 63 

Recommendations to overcome the existing barriers ................................ 64 

Energy services in the public sector and commercial sector ....................... 65 

Energy services in the residential sector ................................................. 66 

iii 

 
16.7 

16.8 

16.9 

Energy services in the industrial sector ................................................... 66 

Conclusions ......................................................................................... 67 

References .......................................................................................... 67 

17 Development of the ESCO Market in Ukraine in 2015 ........................................... 69 

17.1 

17.2 

17.3 

17.4 

17.5 

17.6 

17.7 

17.8 

17.9 

General overview of the market ............................................................. 69 

Legal framework .................................................................................. 69 

Existing barriers to the development of the energy service market ............. 70 

Recommendations to overcome the existing barriers: ............................... 71 

Energy services in the public and commercial sector ................................ 71 

Energy services in the residential sector ................................................. 72 

Energy services in the industrial sector ................................................... 72 

Conclusions ......................................................................................... 73 

References .......................................................................................... 73 

18 Development of the ESCO Market in Belarus in 2015 ............................................ 74 

18.1 

18.2 

18.3 

18.4 

18.5 

18.6 

18.7 

18.8 

18.9 

General overview of the market ............................................................. 74 

Legal framework .................................................................................. 74 

Barriers for the development of the energy service market ....................... 75 

Recommendations to overcome the existing barriers ................................ 76 

Energy services in the public sector........................................................ 76 

Energy services in the residential sector ................................................. 76 

Energy services in the industrial sector ................................................... 77 

Conclusions ......................................................................................... 78 

References .......................................................................................... 78 

19 Development of the ESCO Market in Russia in 2015 ............................................. 79 

19.1 

19.2 

19.3 

19.4 

19.5 

19.6 

19.7 

19.8 

19.9 

General overview of the market ............................................................. 79 

Legal framework .................................................................................. 79 

Barriers to the development of the energy service market: ....................... 80 

Recommendations to overcome the existing barriers ................................ 80 

Energy services in the public sector........................................................ 81 

Energy services in the residential sector ................................................. 82 

Energy services in the industrial sector ................................................... 82 

Conclusions ......................................................................................... 82 

References .......................................................................................... 83 

List of figures ...................................................................................................... 84 

List of tables ....................................................................................................... 85 

iv 

 
Abstract 

The present study aims at giving an overview of the status of the ESCO market in the EU 
Enlargement  and  Neighbouring  Countries,  contextualising  the  legal  frameworks  and 
identifying the barriers that slow down the development of the energy service companies. 

An  in-depth  analysis  of  ESCOs  status  is  provided  for  the  following  countries:  Albania, 
Bosnia  and  Herzegovina,  Kosovo,  Moldova,  Montenegro,  Serbia,  the  former  Yugoslav 
Republic of Macedonia, Turkey, Ukraine, Belarus and Russia. 

1 

 
 
Acknowledgements 

The authors would like to thank the reviewers for the useful and constructive comments, 
the  local  experts  that  provided  information  on  local  markets.  Special  thanks  to  the 
European  Commission's  Joint  Research  Centre's  colleagues  including  Laura  Rappucci  for 
the editing. 

Authors 

Panev Strahil (Independent consultant, Bonn, Germany) 

Paolo Bertoldi (European Commission, Joint Research Centre) 

Boza-Kiss Benigna (Independent consultant, Laxenburg, Austria) 

Valentina Palermo (European Commission, Joint Research Centre) 

2 

 
 
Executive summary 

During  the  2013-2015  period,  the  ESCO  markets  of  the  EU  Enlargement  and 
Neighbouring  Countries  (namely  Serbia,  Montenegro,  Bosnia  and  Herzegovina,  Albania, 
Kosovo,  the  former  Yugoslav  Republic  of  Macedonia,  Moldova,  Belarus,  Ukraine,  Turkey 
and Russia) remained almost unchanged compared to the 2010-2013 period. 

In  general  the  ESCO  market  for  these  countries  is  at  a  preliminary  stage.  In  some 
countries  (such  as  the  former  Yugoslav  Republic  of  Macedonia)  the  energy  services 
market  is  not  yet  developed  and  there  are  very  few  projects  implemented  with  ESCO 
financing to date. The development of the ESCO market is hindered mainly by legal and 
financial issues, which are differentiated country by country. 

The present study aims at giving an overview of the status of the ESCO market in the EU 
Enlargement  and  Neighbouring  Countries,  contextualising  the  legal  frameworks  and 
identifying the barriers that slow down the development of the energy service companies. 
A  set  of  suggestions  and  recommendations  is  then  provided  to  enhance  the  market  for 
energy services in the Western Balkan Countries, Moldova, Ukraine, Russia, Belarus, and 
Turkey. 

Furthermore, an insight is carried out sector by sector, focusing on residential, industrial 
and public buildings. 

After  this  overview,  which  gives  a  clear  picture  of  the  general  situation  of  the  ESCO 
market  in  the  region,  an  in-depth  analysis  of  ESCOs  status  is  provided  for  each  of  the 
eleven countries under analysis in chapters 9 to 19. 

3 

 
 
1  Introduction 

During  the  2013-2015  period,  the  ESCO  markets  of  the  EU  Enlargement  and 
Neighbouring  Countries  (namely  Serbia,  Montenegro,  Bosnia  and  Herzegovina,  Albania, 
Kosovo,  the  former  Yugoslav  Republic  of  Macedonia,  Moldova,  Belarus,  Ukraine,  Turkey 
and Russia) remained almost unchanged compared to the 2010-2013 period. 

In  general  the  ESCO  market  for  these  countries  is  at  a  preliminary  stage.  In  some 
countries  (such  as  the  former  Yugoslav  Republic  of  Macedonia)  the  energy  services 
market  is  not  yet  developed  and  there  are  very  few  projects  implemented  with  ESCO 
financing to date. The development of the ESCO market is hindered mainly by legal and 
financial issues, which are differentiated country by country. 

The present study aims at giving an overview of the status of the ESCO market in the EU 
Enlargement  and  Neighbouring  Countries,  contextualising  the  legal  frameworks  and 
identifying the barriers that slow down the development of the energy service companies. 
A  set  of  suggestions  and  recommendations  is  then  provided  to  enhance  the  market  for 
energy services in the Western Balkan Countries, Moldova, Ukraine, Russia, Belarus, and 
Turkey. 

Furthermore, an insight is carried out sector by sector, focusing on residential, industrial 
and public buildings. 

After  this  overview,  which  gives  a  clear  picture  of  the  general  situation  of  the  ESCO 
market  in  the  region,  an  in-depth  analysis  of  ESCOs  status  is  provided  for  each  of  the 
eleven countries under analysis in chapters 9 to 19. 

4 

 
 
 
2  Status of the national ESCO markets 

During  the  2013-2015  period,  the  ESCO  markets  of  the  Western  Balkan  Countries 
(Serbia, Montenegro, Bosnia and Herzegovina, Albania, Kosovo and the former Yugoslav 
Republic of Macedonia) remained almost unchanged compared to the 2010-2013 period. 
This  chapter  gives  an  overview  of  the  current  status  of  the  ESCO  market  in  these 
countries. 

In Serbia and Bosnia and Herzegovina, the ESCO markets are still in a preliminary phase. 
In  particular,  in  the  Serbian  market  several  ESCO  companies  are  active  as  of  2015. 
These are private companies founded by domestic capital or subsidiaries of regional and 
international  ESCO  companies  in  order  to  be  active  in  the  residential  and  industrial 
sector.  The  residential  projects  are  realized  on  the  basis  of  energy  supply  contracting 
(ESC).  The  legal  conditions  for  the  introduction  of  the  EPC  model  in  the  public  sector 
were created in 2015 in Serbia, as a part  of the implementation of the Regional Energy 
Efficiency  Program  for  the  Western  Balkans  (REEP)  founded  by  the  European  Bank  for 
Reconstruction  and  Development  (EBRD).  Furthermore,  tenders  for  street  lighting 
projects  based  on  EPC  were  published  in  several  Serbian  municipalities  within  the 
framework  of  REEP.  However,  the  process  for  tendering  of  energy  services  in  Serbian 
municipalities is still very slow. 

In Bosnia and Herzegovina, there are several companies, which provide energy services 
based on ESC, although these are not officially registered as ESCOs. Projects target the 
improvement  of  heating  systems  in  the  public  sector  (health  and  educational 
institutions). In most of the projects, energy services providers  carried out replacement 
of oil heated boilers with biomass boilers (fuel switch). 

In  Albania,  Kosovo,  Montenegro  and  Macedonia,  the  market  for  energy  services  is  still 
non-existent.  Lack  of  secondary  legislation  for  ESCOs,  complicated  procurement  rules 
and  unfavourable  legislation  for  EE  investment  in  municipalities,  combined  with  the 
absence of state incentives for EE hamper the development of the ESCO market in these 
countries.  

In  Moldova,  the  ESCO  market  is  still  in  a  very  preliminary  phase.  The  main  reasons 
include  the  high  cost  of  capital,  low  prices  for  energy  and  the  lack  of  incentives  for 
developing  the  ESCO  market.  The  United  Nations  Development  Programme  (UNDP) 
project  “ESCO  Moldova  –  Transforming  the  market  for  Urban  Energy  Efficiency  by 
introducing  Energy  Service  Companies”  (“ESCO  Moldova  project”)  supports  Moldovan 
government in the development of ESCO legislation and the creation of market condition 
for the introduction of EPC. 

The  ESCO  market  in  Ukraine  has  changed  from  a  phase  of  stagnation  during the  2013-
2014  period,  into  a  phase  of  minor  growth  as  of  2015.  This  change  in  the  market  is 
associated  with  the  adoption  of  the  new  ESCO  legal  framework,  which  was  adopted  by 
the Parliament of Ukraine and which established the energy service market in the public 
sector  in  2015.  As  of  2015  between  20  and  30  energy  service  companies  (ESCO)  were 
active on the Ukrainian market. 

Despite the economic downturn in Russia, the energy services market has grown slowly 
during the 2013-2015 period. Few positive changes related to an enhanced promotion of 
energy services and ESCOs can be pointed out to have changed since 2013: (EC, 2016) 

—  The  Russian  Association  of  Energy  service  companies  (RAESCO)  was  established  in 

2014. 

—  The standard titled “Measurement and verification of energy efficiency” were analysed 
and  adopted  by  the  Members  of  the  RAESCO  Council.  This  standard  is  the  first 
standard  of  the  Russian  Federation  in  this  area  and  it  will  prescribe  the  use  of  the 
indicators of energy efficiency and energy savings volumes during the implementation 
of specific projects and energy saving measures. 

5 

 
—  The  state  regulation  (29  orders)  on  energy  services  were  developed  and  adopted. 

Some laws were also changed and factoring was developed. 

Although the Russian market for EE and energy services has a huge potential, the ESCO 
market  is  still  moderate.  There  were  up  to  100  companies  operating  as  energy  service 
providers in 2015. However, it is difficult to determine the exact number of ESCOs, since 
many  of  the  companies  calling  themselves  ESCOs  did  not  actually  offer  guarantees,  or 
link their remuneration to the results of the project. Only few of these companies (about 
10) offer turn-key EPC to their clients that include a technical audit, the development and 
implementation of the required measures, finance and a performance guarantee. Most of 
the  projects  in  the  industrial  sector  have  been  carried  out  though  EPC  by  a  few  ESCOs 
subsidies  of  utility  companies  including  international  companies.  Other  types  of  energy 
service  providers  are  small  companies  which  originally  were  involved  in  energy  auditing 
or turn-key engineering services and are now exploring the ESCO business or Producers 
of  metering  equipment  and  automatic  control  systems  and  IT  integrators  who  are 
starting to work on projects based on the EPC principle. 

The ESCO market in Turkey is still considered as moderate, despite the high potential. As 
of  January  2016  36  ESCOs  (EDV)  were  authorized  by  the  General  Directorate  for 
Renewable  Energy  (DGER)  to  operate  in  the  Turkish  market.  Turkish  ESCOs  focus  on 
industrial  projects  using  state  incentives  for  the  implementation  of  EE  projects.  The 
residential sector, although has very high potential for EE and energy services, is still not 
targeted by Turkish ESCOs. This is due to the high transaction costs and complications in 
setting  up  and  implementing  projects,  making  these  non-economic  in  the  absence  of 
state incentives. The following table provides an overview of the above. 

Table 1. Developmental level of the ESCO markets as of 2015 and the change in level of 
development between 2013 and 2015 

Status  of 
market 

the  ESCO 

Development  between 
2013 and 2015 

Number of ESCOs as of 
2015 

Country 

Albania 

Belarus 

Not existent 

unchanged 

Preliminary/Moderate 

unchanged 

Bosnia and Herzegovina 

Preliminary phase 

unchanged 

Kosovo 

Moldova 

Not existent 

unchanged 

Not Existent/preliminary 

unchanged 

Montenegro 

Not existent 

unchanged 

0 

n/a 

4-51 

0 

0 

0  

Serbia 

Russia 

Preliminary 

slow growth 

5-62 

Preliminary/Moderate 

slow growth 

Up to 1003 

The former Yugoslav 
Republic of Macedonia 

Not existent 

unchanged 

0 

Turkey 

Moderate 

slow growth 

36  (EDV  companies  with 
authorization) 

Ukraine 

Moderate 

Slow growth in 2015 

20-304 

1 They are not registered officially in Bosnia and Herzegovina 
2 According the interviewed experts for the currently reported research 
3 According the interviewed experts for the currently reported research 
4 According the interviewed experts for the currently reported research 

6 

 
                                           
2.1  Legal framework for ESCO 

As  Contracting  Parties  of  the  Energy  Community  Treaty,  Albania,  Bosnia  and 
Herzegovina,  Kosovo,  Montenegro,  Moldova,  Serbia,  the  former  Yugoslav  Republic  of 
Macedonia and Ukraine are obliged to transpose the third energy package and adopt the 
EU acquis on energy efficiency and renewable energy. It includes the transposition of the 
Energy  Service  Directive  (ESD,  2006/32/EC)  and  starting  from  October  2017,  also  the 
Energy  Efficiency  Directive  (EED,  2012/27/EU)  with  some  adaptations.  Both  directives 
include  provisions  for  the  promotion  of  energy  services  in  the  EU  Member  States. 
Therefore,  the  Contracting  Parties  have  to  ensure  the  transposition  of  Article  6  of  the 
ESD  and  -  as  of  October  2017  -  the  transposition  of  Article  18  of  the  EED.  Also,  the 
Contracting  Parties  countries  shall  prepare  National  Energy  Efficiency  Action  Plans 
(NEEAPs),  which  have  to  be  submitted  to  the  Energy  Community  Secretariat.  For  the 
period  2010  –  2018,  each  contracting  party  shall  submit  NEEAPs  prepared  according  to 
ESD  on  a  two  years  basis.  The  NEEAPs  are  very  important  policy  documents  for  the 
development of policies in order to  – inter alia - promote energy services and ESCOs at 
the national level. 

Regarding the transposition of the relevant EU legislation for EE (including Energy Service 
Directive  -ESD,  Energy  Performance  of  Buildings  Directive  –  EPBD    and  Directive  for 
labelling of  energy related products) all countries have made progress in the 2014-2015 
period. However, in Ukraine, Albania, Bosnia and Herzegovina and Kosovo the adaptation 
of related laws and by-laws is pending. 

In  Serbia,  and  Montenegro,  as  well  as  in  Macedonia,  the  definitions  of  the  energy 
services and energy services companies (ESCOs), Energy Performance Contracting (EPC) 
are  incorporated  in  the  Laws  on  Energy  Efficiency  (or  Law  on  efficient/rational  use  of 
energy) or in the Laws on Energy respectively. 

2.2  SERBIA 

For  the  first  time,  the  Law  on  Efficient  Use  of  Energy  (OG  23/2013)  in  Serbia,  gives  an 
explicit definition for energy services company (“ESCO”) and sets out the rules for energy 
performance  contracting  (EPC)  generally  in  line  with  the  Directive  definitions,  aiming  at 
providing  the  overall legal  framework  for  energy  efficiency  arrangements.  The  Rulebook 
Determining Model Contract for Energy Services for Implementation of Energy Efficiency 
Improvement Measures for Public Sector Users was adopted  on the 8th of May 2015 as 
the  secondary  legislation  under  the  Law  on  Efficient  Use  of  Energy  promoting 
investments  in  energy  efficiency.  This  secondary  legislation  consists  of  ESCO  contract 
templates  for  energy  efficiency,  ESCO  investments  in  public  buildings,  and  in  public 
street lighting. This secondary legislation (“ESCO By-Law”) includes two energy services 
contract  models,  one  for  public  buildings  and  another  one  for  public  lighting,  and 
generally  allows  for  public  private  partnerships  to  be  established  between  the  relevant 
public  partner  (e.g.  a  municipality,  a  public  company,  a  State)  and  the  relevant  private 
partner  (i.e.  ESCO  company)  on  a  long-term  basis  wherein  the  installation  and 
management  of  the  energy  efficiency  measures  by  a  private  partner  are  to  be  financed 
from the savings achieved, thereby not involving public debt. Serbia adopted the Second 
NEEAP  in  October  2013.  Promotion  of  ESCO  services  was  mentioned  as  one  of  the  four 
horizontal  measures  showing  the  recognition  energy  services  and  ESCOs  as  one 
important instrument for implementation and financing of EE measures, especially in the 
public sector (municipalities). 

2.3  MONTENEGRO 

In  Montenegro,  the  new  Law  on  Efficient  Use  of  Energy  was  adopted  in  2014.  This  Law 
defines  energy  services  and  ESCOs  and  sets  the  basis  for  the  preparation  of  Energy 
Performance  Contracts.  The  adoption  of  the  Law  on  Efficient  Use  of  Energy  has  also 
enabled a more efficient implementation and further development of by-laws in the field 

7 

 
of  energy  efficiency.  The  ESCO  legislation  is  under  preparation  through  the  support 
provided by the Regional Energy Efficiency Program (REEP) financed by EBRD. 

2.4  FORMER YUGOSLAV REPUBLIC OF MACEDONIA 

In Macedonia, energy services and ESCOs are defined by the Law on Energy adopted in 
2011 and later amended in 2013. This Law gives also legal basis for the establishment of 
an  Energy  Efficiency  Fund,  which  shall  be  crucial  for  supporting  further  development  of 
the  ESCO  market  particularly  in  the  public  sector.  Although  the  second  NEEAP  was 
prepared in 2013, it has not been adopted yet. This document is very important for the 
promotion of  energy services and  ESCOs, since few  EE measures in the public buildings 
sector are referring to energy services and ESCOS. 

2.5  ALBANIA 

Albania adopted the new Law on Energy Efficiency in December 2015. This Law includes 
the necessary provisions for the establishment of the ESCO market in Albania, as well as 
securing  the  financing  through  the  Energy  Efficiency  Fund.  The  Law  prescribes  also 
requirements  for  the  public  sector  to  purchase  energy  efficient  equipment  and 
appliances.  The  2nd  NEEAP  of  Albania  envisages  further  implementation  of  the  Energy 
Efficiency  Law  and  focuses  on  the  development  of  the  ESCO  market  as  prerequisite  for 
the  implementation  of  measures  in  buildings,  water-supply  systems,  public  lighting  and 
industry'  sector.  In  the  2nd  NEEAP  the  financing  mechanisms  proposed,  include 
strengthening  the  role  of  the  EE  Fund,  public  budget,  loans,  subsidies,  International 
Financial Institutions (IFIs), ESCO financing etc. However, sources of financing were not 
clearly identified and presented. Although the first draft of the 2nd NEEAP was prepared 
in November 2013, this strategic paper for further implementation of EE policies, has not 
yet been adopted. 

2.6  KOSOVO 

With  the  adoption  of  the  Law  on  Energy  Efficiency  in  2011,  Kosovo  made  a  significant 
progress  towards  the  creation  of  an  appropriate  legislative  and  institutional  framework 
for  energy  efficiency.  The  Law  on  Energy  Efficiency  transposes  the  key  requirements  of 
the  Directive  2006/32/EC  and  sets  the  legislative  and  institutional  framework  for  the 
implementation of the energy efficiency policy in Kosovo. It sets the legal basis for future 
development/amendment of a secondary legislation. 

As  of  2015,  financing  of  energy  efficiency  projects  is  hampered  due  to  the  lack  of  an 
appropriate framework for innovative financial mechanisms, including the belated setting 
up of the Energy Efficiency Fund stipulated in the Law. 

The amendments to the Law on Public Procurement of 2011 introduced energy efficiency 
criteria in the procurement of energy efficient equipment and vehicles, in line with Annex 
VI  of  Directive  2006/32/EC.  However,  there  is  no  secondary  legislation  in  place. 
Secondary  legislation  on  financing  instruments,  metering  and  informative  billing,  ESCO 
etc. still needs to be adopted for full compliance. 

The  Kosovo  National  Energy  Efficiency  Action  Plan  (NEEAP)  is  a  basic  document  for  the 
implementation  of  Kosovo’s  policies  on  energy  efficiency.  Kosovo’s  first  NEEAP  (2010  – 
2018)  was  approved  by  the  Ministry  of  Economic  Development  in  September  2011. 
Kosovo’s  second  National  Energy  Efficiency  Action  Plan  was  prepared  on  the  basis  of 
Article 10 of the Law on Energy Efficiency, and it was adopted in December 2013. 

2.7  MOLDOVA 

In  Moldova,  the  main  provisions  of  the  Directive  2006/32/EC  (ESD)  are  transposed  by 
the Energy Efficiency Law and by laws for EE. However, the ESD Directive has not been 
fully  transposed.  In  order  to  fulfil  this  obligation,  Moldova  still  needs  to  adopt  a  set  of 
secondary  legislations  on  energy  end-use  efficiency  in  the  public  sector,  ESCO 

8 

 
mechanism,  etc.  The  standard  set  of  documents  for  energy  service  procurement  in  the 
public  sector  was  developed  in  2015  in  the  framework  of  the  “ESCO  Moldova  project” 
implemented by UNDP. In addition, to facilitate the implementation of energy services, a 
general    EPC  model  contract  (with  shared  and  guaranteed  savings)  as  well  as  an  EPC 
model for street lighting were prepared but still needs to be disseminated to be picked up 
by  the  market.  The  First  NEEAP  for  2013  -  2015  was  adopted  in  2013  setting  up  an 
energy savings target of 9% by 2016. The second EEAP of Moldova is under preparation. 

2.8  UKRAINE 

Ukraine  made  some  progress  by  adopting  technical  regulations  and ESCO  support  laws. 
However, a significant number of important laws (including Energy Efficiency Law and the 
Law  on  Energy  Performance  of  Buildings)  and  by-laws  for  EE  were  prepared,  but  they 
have  not  yet  been  adopted  by  the  government.  The  Law  No.  327-VIII  “On  the 
Implementation  of  New  Investment  Opportunities,  Ensuring  Rights  and  Legitimate 
Interests  of  Individual  Entrepreneurs  for  the  Performance  of  Large-Scale  Energy  Sector 
Modernization”  (“ESCO  Law”)  was  adopted  by  the  Parliament  on  9th  of    April  2015.The 
purpose  of  the  “ESCO  law”  is  to  create  a  legal  framework  for  the  introduction  of  new 
investment  opportunities  (including  ESCO)in  the  public  sector,  ensuring  the  rights  and 
legal  interests  of  business  entities  while  conducting  a  large-scale  energy  efficiency 
projects  through  the  mechanism  of  energy  services.  In  November  2015,  the  Cabinet  of 
Ministers  adopted  the  National  Energy  Efficiency  Action  Plan  until  2020,  compliant  with 
the requirements of the Directive 2006/32/EC. The key  priorities for Ukraine remain the 
adoption of the  Energy  Efficiency Law and the  Law on  Energy  Performance  of Buildings. 
These two laws are determinant for scaling up the implementation of EE measures in the 
buildings sector. 

2.9  TURKEY  

In Turkey,  The  Energy  Efficiency Law (EEL,  Number 5327) adopted in 2007 and revised 
in  2011  stipulates  the  definition  of  energy  services  and  set  the  basic  requirements  for 
implementation of energy services in Turkey.  This Law prescribes the training of energy 
managers and energy auditors as well as procedure for authorization of the EDV (ESCO) 
companies. As of 2015, Turkey is working on the preparation of the first NEEAP. 

9 

 
 
 
3  Barriers to the ESCO industry 

3.1  Legal barriers 

Although, as described in the previous chapter, all countries included in this report have 
already a legal framework in place for EE and/or ESCOs, there is still a lot to be done in 
terms  of  ensuring  a  supportive  and  not  hampering  the  legal  framework,  in  particular  in 
the following areas: 

—  Public procurement of energy services; 

—  Investment in EE in municipalities; 

—  Energy efficiency in buildings(public, residential and commercial); 

—  Monitoring  and  measurement  of  energy  consumption  in  public,  commercial  and 

residential buildings; 

—  Energy auditing and energy management in the service (public and commercial) and 

industrial sector; 

—  Creation of homeowner associations as legal entities in the residential sector; 

—  Maintenance of multi apartment buildings; 

In Albania, the EE legislation needs to be completed with the Law on Energy Performance 
of Buildings and by-laws that will make the legislation applicable. In addition, the lack of 
clarity  about  the  procurement  procedure  and  due  to  the  fact  that  the  Law  on  Public 
Procurement does not directly recognize ESCO contracts, make implementation of ESCO 
model  difficult  in  the  public  sector.  It  is  expected  that  the  Law  on  Public  Private 
Partnership  (PPP),  which  is  under  preparation,  will  provide  guidance  and  the  basis  for 
procurement and contracting ESCO projects in the public sector. 

In Bosnia and Herzegovina, the Law on Energy Efficiency and the Energy Efficiency Action 
Plan (EEAP) were adopted by Republika Srpska, but the Law on Energy Efficiency has still 
not been adopted by the Federation of Bosnia and Herzegovina (since September 2014). 
In  the  Federation  of  Bosnia  and  Herzegovina  as  well  as  in  the  Brcko  District,  the  full 
package  of  primary  and  secondary  legislation  transposing  ESD  (Directive  2006/32/EC), 
as well as the adoption of a state-level EEAP (Energy Efficiency Action Plans) have been 
waiting  for  adoption.  Amendments  are  needed  on  the  state-level  Law  on  Public 
Procurement to include energy efficiency criteria. Therefore, Bosnia and Herzegovina still 
fails  to  comply  with  ESD  in  terms  of  EE  including  energy  services  (Energy  Community 
2016). 

Although,  Macedonia  has  progressed  in  the  implementation  of  the  energy  efficiency 
acquis,  including  the  update  of  primary  and  secondary  legislation,  there  is  further  need 
for the preparation of secondary legislative for energy services and predefined EPC. The 
process  of  the  adoption  of  the  complete  legislation  for  ESCOs  has  to  be  finished.  Apart 
from  that,  some  changes  and  additions  are  needed  in  existing  legislation,  especially 
regarding the public procurement (Energy Community 2016). 

In Montenegro, the Law on Public Procurement does not cover ESCO contracts, since this 
kind of relation and investments cannot be treated as public procurement. The solution is 
to  put  it  through  the  Law  on  Public  Private  Partnership.  The  implementation  of  the 
system for certification of energy performance of buildings and inspection of heating and 
air  conditioning  systems  should  start  without  any  further  delay.  Montenegro  should 
improve  statistical  data  collection  and its  system  for  the  calculation  of  energy  efficiency 
indicators and savings, as well as monitoring of EEAP implementation. The methodology 
and  platform  developed  is  a  step  forward.  Nevertheless,  Montenegro  still  needs  to 
develop  the  system  for  implementation.  Adequate  resources,  both  human  and  financial, 
should be dedicated to improve the situation in this area. 

10 

 
The  first  priority  for  Moldova  is  the  adoption  of  missing  secondary  legislation  for 
implementation  of  the  Law  on  Energy  Efficiency  and  the  Law  on  Energy  Performance  of 
Buildings s as well as the introduction of energy efficiency requirements for procurements 
in the public sector. 

Kosovo  lacks  secondary  legislation  related  EE  Law  (based  on  Directive  2006/32/EC). 
Secondary  legislation  on  financing  instruments,  metering,  informative  billing,  ESCO’s, 
etc.  still  needs  to  be  adopted  to  fully  comply  with  the  ESD.  (Energy  Community  2016) 
Both  types  of  the  energy  service  contracts  (EPC  and  ESC)  are  still  not  applicable  in 
Kosovo.  According  to  the  current  legal  framework  only  the  PPP  or  negotiated  contracts 
can be applied. 

In Turkey, the legislation related to local self-government (municipalities) is not in favour 
for development of ESCO services in municipalities. The procurement rules are very strict 
and  complicated.  The  Public-private  partnership  rules  are  also  very  strict.    Absence  of 
appropriate  legislation  for  the  promotion  of  EE  in  multi  apartment  building  (housing 
sector) is also one of the addressed issues. 

In  Ukraine,  the  ESCO  law  and  the  basic  models  of  energy  service  agreements  (actually 
EPC)  have  been  adopted  in  2015  but  they  are  still  not  yet  implemented.  The 
implementation  of  the  legislation has  to  be  enforced  by  the  authorities.  In  addition,  the 
Energy  Efficiency  Law  and  the  Law  on  Energy  Performance  of  Buildings  have  to  be 
adopted as soon as possible. The development and enforcement of the missing technical 
regulations for full transposition of the Energy Performance in Buildings Directive should 
follow. 

In  Russia,  the  regulatory  framework  for  the  public  sector  could  benefit  from  further 
improvements  such  as  the  introduction  of  international  monitoring  and  verification 
protocols,  long-term  budgeting  for  certain  types  of  public  organizations  and  the 
possibility  to  include  other  savings  besides  energy  cost  (such  as  maintenance  cost 
optimization) in the contract. 

3.2  Financial barriers 

In  almost  all  countries  included  in  this  report,  financial  barriers  are  pointed  out  by  the 
interviewed experts as one of the largest obstacles for the development of the market for 
energy  services  and  ESCOs.  In  Serbia,  Russia  and  Ukraine,  ESCOs  finance  projects 
through  their  own  equity  and,  in  very  few  cases,  through  Third  Party  Financing  (TPF). 
This type of financing is difficult on long term, especially for smaller ESCOs due to limited 
liquidity. 

In  Turkey  there  are  some  state  incentives  for  industrial  enterprises  which  can  be  used 
also for funding of ESCOs, but they are very limited and they can be only used for certain 
activities: for example for funding energy audits in industry.  

With regard to funding of energy services and ESCOs several aspects can be stressed: 

—  Lack of energy efficiency funds for funding energy services and ESCOs; 

—  Lack of state incentives for EE and ESCO; 

—  Very high interest rate for EE loans  provided by commercial banks; 

—  Lack of investment portfolio for EE including energy services by commercial banks; 

—  Lack of understanding for ESCO projects; 

—  Lack of know how in preparation and evaluation of EE projects implemented on basis 

of EPC; 

—  High inflation rate and exchange rate instability. 

The lack of an Energy Efficiency Fund is pointed out in Montenegro, Albania, Kosovo, the 
former  Yugoslav  Republic  of  Macedonia,  Bosnia  and  Herzegovina,  Turkey  as  a  key 
barrier.  The  creation  of  energy  efficiency  funds  (EEF)  is  considered  as  an  option  for 

11 

 
scaling  up  energy  efficiency  investment  in  the  public  sector  in  the  Western  Balkan 
Countries.  Under  a  typical  EEF  targeting  the  public  sector,  loans  are  provided  to  public 
entities to cover the initial investment costs of EE projects. These funds can also be used 
for funding projects implemented by ESCOs. 

The  establishment  of  an  EEF  generally  requires  the  development  of  a  legal  framework 
comprising national legislation as well as supporting secondary legislation or regulations 
that  will  define  the  structure  of  the  EEF.  In  some  countries,  as  Albania  and  Kosovo 
creation of an EEF is stipulated in the Laws on Energy Efficiency or in Law on energy as in 
the  case  of  the  former  Yugoslav  Republic  of  Macedonia.  However,  because  of  the 
administrative  and  other  barriers,  the  EEF  are  still  missing.  In  the  former  Yugoslav 
Republic  of  Macedonia,  establishment  of  an  EEF  has  been  postponed  since  the 
government cannot make decision about management structure of the fund. 

In Serbia, the creation of an EEF was authorized by the EE Law adopted in 2013. The EEF 
was created as a line item in the state budget in 2014. It is managed by the Ministry of 
Energy and Mining and provides  financing of EE projects in municipalities. Theoretically, 
ESCO  projects  can  be  funded  from  this  basket,  but  this  has  not  been  realized  in  the 
praxis  yet.  The  EEF  is  not  created  as  a  separate/independent  institution  with  own 
management  structure  and  as  a  revolving  fund.  In  Montenegro  and  Bosnia  and 
Herzegovina, funding of EE projects are provided by existing environmental funds  in the 
form of grants and not as loans. (Limaye et al. 2014) 

In Turkey, incentives have been provided by the government only for the industry sector; 
specifically,  for  the  large  industrial  enterprises  but  they  are  not  enough  to  scaling  up 
energy services. Other  specific incentives should be developed and applied to SMEs and 
especially  to  the  building  and  commercial  sector.  Because,  the  incentives  from  the 
government  has  leverage  effects,  meaning  that  providing  one  unit  could  result  in 
additional investment of 10 units as stated by the ESCOs.(EC, 2016) 

Although the grants provided by the governments or International Financing Institutions 
for  funding  EE  measures  and/or  ESCOs  are  necessary  to  start  up  EE  investments,  it  is 
worth  noting  that  often  they  can  even  spoil  the  market  for  energy  services.  In  many 
countries,  such  as  in  Montenegro,  Bosnia  and  Herzegovina  and  the  former  Yugoslav 
Republic  of  Macedonia  and  Ukraine,  the  public  sector  has  received  only  grants  for  EE 
improvements  in  public  buildings  or  public  facilities  over  many  years.  Therefore,  the 
public  sector  in  these  countries  became  reluctant  to  third  party  financing.  In  Ukraine,  a 
few  years  ago  one  public  ESCO  established  through  grants  provided  by  the  Global 
Environmental Facility (GEF) in the framework of an UNDP project, refused to take loans 
from  banks  to  finance  EE  projects  after  the  end  of  the  project.  Therefore,  grants  and 
similar incentives have to be balanced. They can be used for funding of energy audits or 
up front studies to reduce the transaction cost, but not for funding of whole projects.  

The  commercial  banks  usually  have  limited  understanding  of  the  ESCO  business  model, 
which  is  a  main  financial  barrier  in  all  countries  analysed  in  this  report.  Commercial 
banks  have  limited  knowledge  of  the  EPC  contracts  and  the  benefit  from  energy  and 
financial  savings  resulted  from  them.  In  addition,  the  commercial  banks  have  limited 
capacities to prepare and evaluate EE projects prepared on the ESCO model. 

Commercial banks in Russia, Ukraine, and Belarus consider ESCO business as very risky 
and therefore provide loans with very high interest rates. In Ukraine the current financial 
stability, in which Ukrainian banks have to provide short-term loans at very high interest 
rates  range  from  20%  to  25%  and  even  30%  in  some  cases,  therefore  making  even 
more  difficult  for  ESCO  to  have  access  to  finance  (National  Bank  of  Ukraine,  2015)  In 
addition,  in  Ukraine  the  inflation  rate  and  the  currency  risks  are  extremely  high  for  the 
commercial bank which face an annual inflation rate of approx. 43 %. Energy tariffs are 
approved in a national currency and the exchange rate is difficult to forecast and manage 
(EC, 2016). 

12 

 
3.3  Other barriers for the development of the ESCO markets 

Additional  barriers  that  hamper  the  development  of  the  ESCO  market  in  the  Western 
Balkan Countries, Moldova, Turkey, Ukraine, Belarus and Russia, include: 

—  Complicated and very strict public procurement procedures, 

—  Lack of understanding of energy services and ESCOs, 

—  Lack of trust in outsourcing of EE services and lack of trust in ESCOs; 

—  Lack of interest in investment in EE; 

—  Lack of energy data or lack of reliable data for energy consumption; 

—  Lack of system for measurement and verification of energy savings; 

—  Lack of capacity for monitoring of implemented EE projects; 

—  Lack of umbrella organization (association) of ESCOs; 

—  Lack of standardized EPC or ESC model contract, 

—  Low energy prices. 

13 

 
4  Recommendation and success factors 

4.1  Political commitment 

A  credible  and  long  term  commitment  to  energy  sustainability  and  improved  energy 
efficiency  by  the  governments  and  local  administrations  can  scale  up  the  market  for 
energy services in the Western Balkan Countries, Moldova, Ukraine, Russia, Belarus, and 
Turkey.  These  commitments  shall  be  incorporated  in  the  national  EE  policies  and 
strategies  such  as.  NEEAPs.  The  governments  of  the  Contracting  Parties  of  Energy 
Community  (Western  Balkan  countries,  Moldova  and  Ukraine)  have  developed  their 
National  Energy  Efficiency  Action  Plans  (NEEAPs)  targeting  at  least  9  percent  energy 
savings  by  2018.  In  all  of  the  already  prepared  NEEAPs  the  energy  services  and  ESCOs 
are mentioned as an instrument for implementation of EE measures. The governments of 
Turkey,  Russia  and  Belarus  also  show  strong  political  will  and  readiness  to  improve  EE. 
The government of Turkey also started to develop the NEEAP. 

Local authorities undertake commitments for energy sustainability and the improvement 
of energy efficiency with development of Local (Municipal) Energy Efficiency Action Plans 
(LEEAPs)  and/or  Sustainable  Energy  Action  Plan  (SE(C)AP).  Municipal  energy  planning 
can be a key for improving EE in municipal public buildings if its application is  supported 
by national EE Laws. Implementation of EE measures identified in Local Energy Efficiency 
Action  Plans  (LEEAPs)  needs  financial  support  either  from  the  national  government  or 
from  the  private  sector  in  the  form  of  energy  service  companies  (ESCOs).  It  will 
stimulate  investment  in  EE  and  it  will  scale  up  the  ESCO  markets.  Many  municipalities 
from  the  Western  Balkan  Countries,  Moldova,  Belarus  and  Ukraine  already  signed  the 
Covenant of Mayors Initiative and prepared and submitted a SEAP (see Table 2). 

Table 2. The number of Covenant of Mayors signatories, and submitted and accepted SEAPs as of 
October2018 

Country 

Albania 

Belarus 

Bosnia and Herzegovina 

Kosovo* 

Moldova 

Montenegro 

Serbia 

Russia 

The  former  Yugoslav  Republic  of 
Macedonia 

Turkey 

Ukraine 

Number 
signatories 

of 

Number 
submitted SEAPS 

of 

Number  of  accepted 
SEAPs 

3 

39 

21 

2 

20 

3 

1 

- 

1 

16 

181 

1 

11 

19 

- 

14 

3 

1 

- 

1 

11 

85 

- 

4 

12 

- 

10 

1 

1 

- 

1 

6 

46 

Source Covenant of Mayors web page: http://www.covenantofmayors.eu/ 

In the process of preparation of LEEAPs and SEAPs, energy services and ESCOs shall be 
considered as one of the instruments for the implementation and/or possible solution to 
fund EE projects, in the public, residential and industrial sector. In most of the countries, 

14 

 
SEAP preparation has been strongly supported by International Donors and International 
Financing  Institutions  (IFIs)  through  their  technical  assistance.  Therefore,  international 
energy  experts  can  transfer  through  local  action  plans  and  SEAPs  their  expertise  and 
experience regarding energy services and ESCOs. 

4.2  Supportive EE and ESCO legal framework 

EE and the ESCO legal framework are essential for the development of the ESCO market.  
The ESCO legal framework in most of the countries in the EU is an integral component of 
Energy  Laws  or  Energy  Efficiency  Laws.  Therefore,  the  implementation  of  the  EE  legal 
framework  direct  enforces  the  implementation  of  the  ESCO  legal  framework.  However, 
there  are  also  countries  where  energy  services  and  ESCOs  are  regulated  by  separate 
laws or by-laws. 

The full transposition of EU acquis for EE in the contracting parities of Energy Community 
(Western  Balkan  Countries,  Moldova  and  Ukraine)  will  scale  up  the  ESCO  market  since 
the enforcement of the EE legislation will stimulate public and private investments in EE.  
However, the ESCO provisions in the Energy Efficiency   or Energy Laws are not sufficient 
if  for  instance  the  necessary  secondary  legislation  for  EPC  is  missing.  Therefore,  legal 
framework (in particularly secondary legislation) has to be prepared  and adopted in the 
very next future in Moldova, Montenegro, Bosnia and Herzegovina, Albania and Kosovo.  
The legal framework of Serbia and Ukraine, in which energy services in the public sector 
are  regulated  by  separate  laws  and  by  laws,  can  be  a  good  example  for  all  other 
countries of the Energy Community. 

4.3  Creation of an energy efficiency fund 

Creating  an  energy  efficiency  fund  can  help  to  overcome  existing  financial  and 
implementation  barriers  for  faster  development  of  ESCO  business  in  Western  Balkan 
Countries.  However,  because  of  the  lack  of  experience  and  know  how  in  setting  up  this 
kind  of  financial  facilities,  this  process  should  be  supported  by  International  Financial 
Institutions,  which  already  have  implemented  similar  projects  all  over  the  world.  Each 
country  should  have  adopted  own  models  of  EERF  taking  into  account  its  own  legal 
aspects and market circumstances. Involvement of the public sector (public agencies) will 
be  necessary  to  stimulate  the  market  for  energy  services.  At  the  beginning  of  the 
operation EERFs can finance implementation of projects in the public sector buildings and 
facilities  through  loans  with lower  interest  rate  and  longer  pay-back  period.  Funding  for 
start-up of EERFs can be provided by International Financial Institutions (in form of soft 
loans  or  grants)  and  from  government  budget  allocations.  The  creation  of  a  proper 
managing  structure  of  EERFs  will  be  a  crucial  issue  for  the  smoothly  functioning  of  the 
EERFs. In some countries it will be recommended to engage a private company with long 
years'  experience  in  EE  to  manage  the  EERF.  The  positive  example  with  EERF  and 
development  of  the  ESCO  market  from  Bulgaria  can  be  used  in  other  Western  Balkan 
Countries, since they have certain similarity to Bulgaria. 

In the Guidance Note “ Scaling Up Energy Efficiency in Buildings in the Western Balkans - 
Establishing  and  Operationalizing  an  Energy  Efficiency  Revolving  Fund”  prepared  by 
Limaye Dili, Jas Singh and  Kathrin Hofer for World Bank all aspects of Energy efficiency 
revolving funds (EERF) in Western Balkan Countries were  analysed. 

4.3.1  Creation  of  energy  efficiency  funds  (EEF),  financing  barriers  and 

implementation options. 

In the case of Energy efficiency revolving funds (EERF), some of the resulting savings are 
then  used  to  repay  the  EERF  until  the  initial  investment  is  recovered,  plus  interest  and 
service charges. The repayments can then be used to finance additional projects, thereby 
allowing  the  capital  to  revolve  creating  a  sustainable  financing  mechanism.  Since  both 
the  borrower  and  lender  are  publicly  owned,  such  funds  may  often  offer  lower-cost 
less-stringent  security 
tenors  (repayment  periods)  and 
financing  with 

longer 

15 

 
requirements than typical commercial loans. Because  EE projects have positive financial 
rates  of  return,  capturing  these  cost  savings  and  reusing  them  for  new  investments 
creates  a  more  efficient  use  of  public  funds  than  a  typical  budget  or  grant-funded 
approaches. This can help to demonstrate the commercial viability of EE investments and 
provide  credit  histories  for  public  agencies,  paving  the  way  for  future  commercial 
financing. An EERF is generally capitalized from a range of sources, such as concessional 
loan  or  grant  funds  from  donor  agencies,  government  budget  allocations,  special  tariffs 
or levies on electricity sales, petroleum taxes, revenue bonds, environmental charges  or 
other  sources.  Options  include  creating  the  fund  under  an  existing  ministry,  energy 
agency,  or  development  bank;  creating  a  new  legal  entity  (independent  corporation  or 
new  statutory  agency);  not-for-profit  entity;  or  establishing  a  public-private  partnership 
(PPP). 

Figure 1. Process for establishing an Energy Efficiency Fund 

Source: “Scaling Up Energy Efficiency in Buildings in the Western Balkans - Establishing and Operationalizing an 
Energy Efficiency Revolving Fund” Guidance Note prepared for World Bank 

An  EERF  should  be  designed  to  serve  the  needs  of  all  public  agencies.  Therefore,  in 
addition to debt financing (i.e., loans) for EE projects, the EERF may have other financing 
options,  or  “windows,”  that  may  include  energy  service  agreements,  risk  guarantees, 
grants, and budget capture; this guidance note presents a summary of these options.  

The EERF should also provide technical assistance to public agencies and ESPs, and may 
provide  procurement  and  implementation  services  that  will  transfer  some  of  the 
implementation  risk  to  ESPs  and  facilitate  the  development  of  an  energy  services 
market.” (Limaye et al. 2014) 

The EERF may also use a risk-sharing mechanism by providing credit or risk guarantees 
to commercial banks and other financial institutions (FIs) in order to leverage commercial 
financing for EE projects. 

Under  the  ESA  or  EPC  option,  the  EERF  can  engage  private  energy  service  providers  to 
provide  some  implementation  services  using  simple  performance-based  contracts.  This 
approach  can  help  transferring  some  of  the  project  implementation  risk  to  the  private 
sector. It can also help to build the capacity of the ESPs and facilitate the development of 
an energy services market. 

16 

 
 
 
 
4.4  Establishment of ESCO associations 

Associations  of  energy  service  providers  and  ESCOs  play  a  very  important  role  as 
facilitators  and/or  mediators  of  ESCOs.  They  represent  the  interest  of  their  members 
(ESCOs)  in  front  of  the  government  and  can  participate  as  mediators  in  the  case  of 
dispute  between  ESCOs  and  their  clients.  They  participate  in  the  development  of 
legislation  and  regulation  in  regards  to  energy  services,  especially  in  the  public  and 
residential sectors. Also ESCO associations promote energy services and ESCOs through 
organization  of  dedicated  events  as  conferences  and  workshops.  Therefore,  the 
establishment  of  ESCO  associations  has  to  be  supported  by  governments  and 
international organization. 

The Russian Association of Energy service companies (RAESCO) was established in 2014 
and  participate  in  the  preparation  and  adoption  of  the  standard  named  “Measurement 
and verification of energy efficiency. 

4.5  Development of guidelines,  standard procurement procedures 

and EPC model contracts for the public sector 

The  lack  of  understanding  for  ESCO  concept  by  public  administration  in  charge  of  the 
preparation  of  public  tender  documentation  for  energy  services,  the  complex  and  very 
strict  procurement  procedures  for  public  tenders  as  well  as  the  lack  of  standard  model 
contracts  for  EPC,  are  identified  as  the  main  barriers  for  the  development  of  ESCO 
services in the public sector in all countries included in this report. High transaction costs 
resulted from long preparation and organization period for the public tendering of energy 
services  can  be  reduced  with  the  introduction  of  standardized  tender  documents  and 
standardized tender procedures. In this context, the preparation of tender guidelines for 
energy  services  will  be  very  useful.  The  introduction  of  EPC  contracts  model  also  can 
reduce  transaction  costs  and  increase  the  trust  between  the  clients  (public  sector)  and 
ESCOs. 

International  donors  such  as  UNDP,  GIZ,  USID,  and  International  Financial  Institutions, 
EBRD,  World  Bank,  can  support  governments  in  the  preparation  of  guidebooks  for 
tendering energy services as well as in the development of EPC. 

Through the support provided by EBRD Serbia has prepared and already adopted the EPC 
contracts  model  for  the  implementation  of  projects  in  the  public  sector's  buildings  and 
municipality  street  lighting.  Ukraine  developed  energy  service  agreements  for  the 
implementation of energy services in the public sector. In Bosnia and Herzegovina, draft 
versions  of  contracts  model  for  EPC  in  public  buildings  and  street  lighting  have  been 
prepared but both have yet been not adopted. 

In Russia, the two-stage procurement procedure introduced in January 2014 may partly 
help  addressing  the  issue  regarding  the  high  transaction  cost  for  the  preparation  of 
projects, as ESCOs will not have to undertake a full-scale investment-grade audit before 
bidding. Under the new procedure, this audit will only be required in the second stage of 
the  procurement  procedure  when  the  public  client  has  shortlisted  a  small  number  of 
ESCOs. 

4.6  Monitoring and measurement of energy consumption  

Introducing measurement and monitoring of energy consumption will result in producing 
reliable energy data, necessary for implementing ESCO (EPC) models. Introducing energy 
management  systems  and  energy  auditing  in  the  public  sector  and  in  larger  energy 
consumers (industrial and commercial enterprises) will improve the quality and quantity 
of energy data and will enable the preparation of pre-feasibility and full scale investment 
audit with higher accuracy. 

In  Serbia  and  Turkey  the  introduction  of  energy  management  systems  and  energy 
managers  is  enforced  by  law.  Energy  audits  for  larger  enterprises  and  the  public  sector 

17 

 
are  voluntary  and  they  are  still  not  enforced  by  a  legislation  in  the  Western  Balkan 
Countries (except Serbia and Montenegro), Turkey and Moldova. In Russia, energy audit 
is  mandatory  for  public  buildings.  However,  by  October  2017  contracting  parties  of 
Energy  Community  shall  transpose  and  bring  to  force  the  Energy  Efficiency  Directive, 
which will result in introducing mandatory energy audits for all, larger enterprises as well 
as for public sector. 

The measurement of energy consumption and consumption based billing is an issue that 
shall be addressed in the case of projects in the public and residential sector. In almost 
all of the Western Balkan countries (Serbia, the former Yugoslav Republic of Macedonia, 
Bosnia  and  Herzegovina),  Ukraine,  Russia  and  Belarus,  the  measurement  of  heat 
consumption in multi apartment buildings is still an issue. Tenants are not motivated to 
save energy and to invest in EE since it does not bring any benefits to them. Therefore, it 
will  be  important  to  enforce  the  legislation  for  mandatory  measurement  of  energy 
consumption  and  to  install  metering  devices  in  each  apartment  of  residential  buildings. 
Some  countries  (Serbia,  the  former  Yugoslav  Republic  of  Macedonia)  have  already 
adopted such a regulation. 

4.7  Development  of  a  system 
verification of energy savings 

for 

the  measurement  and 

A  credible  method  for  measurement  and  verification  of  energy  savings  is  necessary  for 
transparency  and  correct  implementation  and  running  of  ESCO  projects.  Furthermore, 
disputes  between  an  ESCO  and  its  clients  about  the  project  results  (achieved  energy 
savings),  which  in  most  of  the  cases  has  financial  implication  for  both  sides,  can  be 
avoided. Therefore, it is necessary to introduce either national or international protocols 
and standards or other instruments for measurement and verification of energy savings. 
Russia adopted the standard named “Measurement and verification of energy efficiency” 
which will allow assessing the indicators of energy efficiency and energy savings volumes 
during  the  implementation  of  specific  projects  and  energy  saving  measures.  Western 
Balkan  Countries  (Serbia,  Montenegro,  the  former  Yugoslav  Republic  of  Macedonia, 
Kosovo,  Albania)  have  prepared  and  adopted  National  Methodologies  for  Measurement 
and verification of energy savings from the NEEAP. In addition, the implementation of a 
web based platform for Measurement and verification of energy savings from NEEAP and 
SEAPs  started  in  2014.  The  development  of  both  activities  has  been  supported  by  GIZ 
since  2010.  This  platform  can  be  used  also  for  verification  of  achieved  energy  saving 
from EE projects implemented by ESCOs. 

4.8  Capacity building for energy efficiency and ESCO 

The  lack  of  understanding  for  energy  efficiency  and  energy  services  (ESCO)  was 
mentioned as a barrier in public, commercial, industrial, financial   and residential sector 
in all countries. In many cases the public sector is reluctant to contract private ESCOs for 
the implementation of EE measures, due to the lack of understanding for  ESCO concept 
and  low  trust  in  ESCOs.  Capacity  building  activities  such  as  e.g.  training  of  energy 
experts  employed  in  the  public  sector  for  the  identification/preparation  of  EE  project 
(measures)  from  LEEAPs  and  SEAPs,  can  result  in  increased  level  of  understanding  and 
knowledge  for  energy  services.  These  experts  can  participate  in  the  preparation  of 
bidding documents for EE projects, based on ESCO (EPC) model. For the commercial and 
industrial  sector,  capacity  building  training  programs  for  energy  managers  and  energy 
experts  shall  be  developed  to  recognize  benefit  of  EE  projects  implemented  by  energy 
services  provided  and  ESCOs.  In  addition,  capacity  building  trainings shall  be  organized 
for  professional  engineers  (mechanical,  electro,  and  construction)  employed  in  private 
engineering companies (potential ESCOs), in order to be able to develop and implement 
EE projects by applying an ESCO concept. Dedicated training on capacity building should 
be  developed  also  for  the  banking  sector  in  order  to  obtain  basic  knowledge  that  allow 
acknowledging  and  recognizing  the  financial  benefit  of  ESCO  projects  on  the  long  term, 
as well as to evaluate ESCO projects. 

18 

 
With  the  development  and  implementation  of  capacity  building  programs  supported  by 
international donor and financial organization, the necessary know how and experience is 
ensured.  EBRD,  World  Bank,  GIZ,  UNDP  have  been  already 
in  the 
implementation of capacity building activities in Serbia, Moldova, Ukraine and Bosnia and 
Herzegovina  since  several  years.  The  involvement  of  international  ESCOs  for  the 
realization of trainings will also be necessary. 

involved 

4.9  Promotion of energy services, the ESCO model and ESCOs 

Promotion  of  energy  services  and  ESCOs  is  one  of  the  most  important  drivers  for  the 
development of  ESCO  markets. Management of industrial enterprises, public enterprises 
and public authorities are often reluctant to outsource the maintenance of old and/or new 
installations  of  energy  equipment  (e.g.  house's  boiler  or  HVAC  systems)  since  they  are 
not familiar with the  ESCO model. Therefore, activities (workshop, conferences) for the 
promotion  of  energy  services  and  ESCOs  have  to  be  carried  out  in  all  countries.    In 
addition,  with  the  support  of  International  Donor  organization,  pilot  projects  on  ESCO 
basis  including  dissemination  of  project  results  should  be  realized.  EBRD  has  already 
started  the  realization  of  pilot  projects  in  the  City  of  Dnepropetrovsk  in  Ukraine.  (See 
information about the project in the Ukrainian chapter) 

19 

 
5  ESCO in the public sector and tertiary sector 

The public sector in the Western Balkan Countries, Moldova, Ukraine, Russia and Belarus 
shows a significant energy saving potential. Estimated energy savings in public buildings 
range between 35 percent and 40 percent in the Western Balkan Countries and are the 
highest among the building sector (World Bank Group. 2014). This potential remains still 
underutilized,  because  of  the  many  mentioned  barriers  (financial,  legal,)  that  hamper 
investment  in  the  public  sector.  ESCOs  and  energy  services  providers  can  help  to 
overcome some of the existing financial barriers to scaling up implementation of energy 
efficiency.  On  the  other  hand,  European  and  International  experience  shows  that  the 
public  sector  can  encourage  the  establishment  and  growth  of  the  ESCO  market  by 
providing  a  stable  demand  for  services,  clear  procurement  rules,  and  access  to  public 
financing (World Bank Group. 2014). 

Although,  ESCOs  can  provide  many  services  to  the  public  sector,  ESCO  market  in  this 
field  is  still  underdeveloped  in  Albania,  the  former  Yugoslav  Republic  of  Macedonia, 
Kosovo*,  Turkey  or  is  in  a  preliminary  phase  as  in  Serbia,  Bosnia  and  Herzegovina, 
Ukraine  and  Russia.  In  Belarus,  the  ESCO  market  in  the  public  sector  is  more  covered, 
since  the  public  ESCOs  implement  the  project  in  the  government  owned  buildings  and 
utilities companies. In the developing countries, ESCOs are small private companies with 
limited technical and financial capabilities. 

“Their  ability  to  obtain  commercial  financing  is  constrained  by  their  limited  assets  and 
weak  balance  sheets;  their  limited  track  record  in  the  market;  the  perception  of 
commercial lenders that EE projects are highly risky; the lenders’ unfamiliarity with, and 
the  lack  of  technical  due  diligence  capabilities  to  properly  appraise,  EE  projects.  These 
constraints prevent them from accessing financing or guaranteed savings, as with ESCOs 
in Western Europe and North America” (World Bank. 2014) 

The  development  of  the  market  for  energy  services  faces  a  number  of  barriers  in  the 
public  sector.  The  Guidance  note  “Municipal  Budgeting  and  Finance”  prepared  by  the 
Network  of  Association  of    Local  Authorities  in  South-East  Europe  (NALAS  )  addressed 
several issues that hamper  investment in EE  and development of ESCO market  on local 
(municipality) level as (NALAS. 2014). 

—  The low priority of investments to improve EE in municipal buildings. The lack 
of  information  and  awareness  of  local  decision  makers  regarding  the  need  and 
economic potential for improving EE in municipal public buildings and as long as the  
citizens  experience  deficits  in  public  service  infrastructure,  EE  investments  in 
municipal buildings are  likely to remain a low priority for municipal decision makers. 
Where  municipal  investment  priorities  include  public  building  rehabilitation,  they 
usually  focus  on  critical  and  structural  issues  or  the  beautification  of  facades,  rather 
than  on  EE  improvements.  In  most  cases,  municipalities  see  EE  as  important  only 
when necessary to comply with EE priorities set by international financial institutions 
(IFIs)  or  bilateral  donors  providing  funds  for  building  rehabilitation  demonstration 
projects. 

—  Low  share  of  Energy  Expenditures  in  Municipal  Budgeting.  Although  energy 
prices  are  increasing  in  all  six  countries,  the  political  relevance  of  total  energy 
expenditures of municipalities is still low. Mayors and council members are not aware 
of  the  amount  of  the  total  annual  energy  bill  of  their  municipality.  This  is  because 
energy is not a separate category in any of the municipal budget plans (it is usually 
subsumed  under  “goods  and  services”),  and  energy  costs  are  scattered  within  a 
variety  of  budget  categories.  Energy  costs  also  tend  to  form  a  relative  low  share  of 
total municipal budgets—about 1-3 percent. 

—  Lack  of  capacity  to  access  to  funds  or  to  effectively  implement  EE  projects 
and limitations on local borrowing. Most of the municipalities in the six countries 
have  borrowing  restrictions,  are  not  creditworthy,  or  they  have  limited  access  to 
credit.  Those  that  are  able  to  borrow  often  have  debt  levels  near  or  at  their  legal 

20 

 
limitations for municipal borrowing. Debt limits are defined by law for municipalities in 
each of the six countries. 

—  One-Year  Budgeting  Process.  In  Albania,  Montenegro,  and  Serbia,  municipalities 
lack  reserves  or  other  means  to  carry  over  budget  provisions  from  one  year  to  the 
next.  They  must  balance  their  annual  expenditures  with  revenues  received  in  the 
same budget year, or by means of loans taken from financing institutes in the same 
year.  Municipal  budget  rules  do  not  provide  for  any  internal  accounting  mechanism 
that would allow for the direct amortization of one year’s investments using the next 
years’ additional revenues or energy savings. This applies also  for EE investments in 
municipal public buildings. 

—  Lack  of  budgetary  provisions  for  retaining  energy  cost  savings  in  future 
years to repay any debts incurred. Without the ability to keep cost savings, most 
public agencies in the Western Balkans lack the incentive to implement EE measures. 
Such rules also constrain the agencies’ ability to repay loans or enter into multi-year 
EPCs  if  the  payments  would  be  derived  from  energy  cost  savings  in  future  years. 
Municipalities  and  some  autonomous  entities  (e.g.,  hospitals  and  schools)  receive 
budgetary  allocations  based  on  a  formula  and  thus  may  not  experience  budgetary 
reductions  if  energy  costs  go  down.  Resolving  this  often  requires  amending  existing 
budgeting rules and procedures to allow public agencies to retain  the energy savings 
at least for the length of the ESPC or EE loan period. 

—  Lack  of  separate  accounts  for  capital  and  operating  expenditures  makes  EE 
investments  (which  are  considered  capital  expenditures)  difficult  to  repay  using 
energy  cost  savings  (considered  operating  expenses).  It  is  common  practice  in 
municipal  budgeting  all  over  Europe  to  separate  the  accounts  for  operating 
expenditures  (such  as  salaries,  goods  and  services,  and  fees)  from  those  for  capital 
expenditures (such as investments, reserves, and loans), where local authorities have 
full local budget autonomy. This approach is not feasible where local authorities have 
limited  budget  autonomy—particularly 
like  Albania,  Bosnia  and 
Herzegovina,  Kosovo,  Macedonia,  and  Serbia,  where  municipalities  depend  on  state 
transfers for both capital and operating budgets. If EE investments generate savings 
on a municipality’s energy bill, the saved operating funds may remain unused if they 
cannot  be  transferred  to  the  capital  budget  (which  would  require  prior  national 
government  approval).  Further,  the  saved  amount  is  usually  deducted  from  the 
operating budget approved by the national government in future years, since budgets 
are often based on the prior year’s actual expenditures. 

in  countries 

—  Line-item budgeting prevents municipalities from using money budgeted for paying 
energy  bills  for  the  repayment  of  loans  for  EE  investments  instead.  The  use  of 
standard  line-item  budgeting  means  that  the  amount  set  aside  in  a  municipality’s 
budget to pay energy bills (measured, for example, in cost per liter, cubic meter, ton, 
or kWh of purchased energy) usually cannot be used for other purposes—in particular 
if  it  is  taken  from  state  subsidies.  This  creates  a  high  uncertainty  among  local 
decision  makers  (as  for  example,  in  BiH  and  the  former  Yugoslav  Republic  of 
Macedonia)  regarding  whether  and  how  they  can  use  this  money  to  procure  EE 
services  instead  of  purchase  energy.  This  is  independent  from  the  question  of 
whether  energy  supply  is  organized  by  the  municipality  itself,  or  one  of  its  public 
utilities, or any other third party. 

—  Short-Term  Perspective  of  Local  Political  Decision  Makers  .The  office  term  of 
mayors and councils in the Western Balkans ranges from three (Albania) to four years 
(Bosnia  and  Herzegovina,  Kosovo,  Macedonia,  and  Serbia) 
five  years 
(Montenegro).  The  elected  politicians  are  usually  focused  on  the  creation  of  visible 
and  tangible improvements  for  their  voters  within  their  office  term,  to improve  their 
chances of being reelected. Therefore, 6-8 year payback periods for EE investments, 
as presented in the ECS average calculated for hospitals and schools in the Western 
Balkans, are usually not compatible with the investment horizons of local politicians. 

to 

21 

 
—  Lack  of  Municipal  Budget  Autonomy.  State  government  control  of  municipal 
budgets is high in the region’s six countries. In each country the national government 
must regularly approve investment budgets, and then provide the municipalities with 
some  or  all  of  the  necessary  investment  funds  from  the  national  budget.  While  this 
does not necessarily constitute a barrier for EE investments per se, it does mean that 
the  municipal  priorities  must  align  with  those  of  the  national  government  which 
creates some unpredictability for budget planning purposes. In cases where a national 
government  does  not  place  a  high  priority  on  EE  investments  and  building 
refurbishment,  particularly  when  compared  with  other  investment  needs,  such 
investment  proposals  may  run  the  risk  of  being  rejected  by  the  Ministry  of  Finance. 
Loans  taken  by  municipalities  are  also  usually  subject  to  national  government 
approval. 

Although  the  NALAS  study  refer  only  to  Western  Balkan  Countries,  above  mentioned 
barriers  exist  also  in  Moldova,  Ukraine  and  Turkey.  Some  of  recommendation  to 
overcome these barriers as well as to scaling up investment in EE (including ESCO) are: 
(NALAS. 2014) 

—  Development  of  a  legal  framework  and  accounting  rules  that  allows  municipalities 
multiyear budgeting and to establish long-term contracts with ESCOs. With multi-year 
budgeting, municipalities can enter into multi-year contracts, since they would not be 
allowed  to  commit  future  funding  that  has  not  yet  been  appropriated.  The 
introduction  of  3–5  year  budget  planning,  such  as  under  the  medium-term 
expenditure  framework  (MTEF),  can  help  reconcile  multiyear  obligations  within  the 
annual  budget  envelope,  provided  that  the  budget  planning  process  is  sufficiently 
robust.; 

—  Reclassifying  EE  investments  as  utility  services,  where  long-term  contracts  are 

implicitly allowed; 

—  Changes of budgeting rules for EE and other cost-saving measures; 

—  Introduction of municipal fiscal decentralization and increasing of revenue sources for 

municipalities; 

—  Creation  of  Energy  Efficiency  (Revolving)  Funds  for  financing  EE  measures  in 

Municipalities. 

—  Allowing municipalities greater autonomy in borrowing without MOF approval; 

—  Integration of municipalities as privileged beneficiaries of national EE Fund schemes;  

—  Exclusion  of  EPC/ESA  repayments  from  public  debt.  Since  EPCs  and  ESAs  are  long-

term contractual obligation; 

—  Introduction of energy accounting and energy management systems and appointment 

of energy managers; 

—  Bundling  of  public  facilities  at  municipal  level  and  standardization  of  documentation 

and procedures; 

—  Preparation  and  implementation  of  Local  (Municipal)  Energy  Efficiency  Action  Plans, 

building renovation strategies for buildings owned by municipalities. 

In  the  last  years  International  Donor  and  Financial  Organization  have  been  helping  the 
government  of  the  Western  Balkan  Countries,  Ukraine,  and  Moldova  to  solve  the  legal 
and  other  barriers  and  to  scale  up  investment  in  EE  and  introduction  of  ESCO  in  the 
public sector. In Serbia the legal framework for ESCO improved in the framework of the 
EBRD  “REEP  program”.  In  addition,  few  public  tenders  for  street  lighting  projects  based 
on  EPC  have  been  realized  in  Serbia.  In  Ukraine  Dnepropetrovsk  Municipal  Energy 
Management  Company  (DMEMC)  and  the  City  of  Dnepropetrovsk  has  received  a  loan 
from the European Bank for Reconstruction and Development (“EBRD”) and a grant from 
the  Eastern  Europe  Energy  Efficiency  and  Environment  Partnership  (“E5P”).The 
intentional use of the proceeds of the EBRD loan and the E5P grant is to finance energy 

22 

 
service companies (“ESCOs”) to implement energy efficiency measures in public buildings 
through energy performance contracts (“EnPC”)(EBRD 2016). 

23 

 
 
6  ESCOs in the residential sector 

There  is  a  significant  energy  saving  potential  in  the  existing  residential  buildings  stock 
within  the  countries  at  analysis  in  this  report.  In  the  Western  Balkans,  the  buildings 
consume about half of the energy. “Estimated energy savings in buildings range between 
20 percent and 40 percent, with the highest potential expected in the public sector (35–
40  percent),  followed  by  the  residential  sector  (10–35  percent)”  (World  Bank  Group 
2014).  A  2012  regional  market  assessment  commissioned  by  the  Energy  Community 
Secretariat  (ECS)  concluded  that  potential  annual  energy  savings  amount  to  about  EUR 
343.2 million or 6,162 GWh. In order to achieve 9% of this target (target until 2018 set 
by  NEEAPs)  Western  Balkan  Countries  shall  invest  EUR  2,7  billion  (World  Bank  Group 
2014).  As  in  the  majority  of  European  countries,  a  large  part  of  the  building  stock  in 
Russia, Turkey and Belarus is obsolete and hides huge energy saving potential and needs 
refurbishment and implementation of energy efficiency measures. 

Although, the residential sector can attract investments in EE projects in the market for 
energy  services  and  ESCOs  is  still  not  developed  in  the  Western  Balkan  Countries, 
Moldova,  Turkey,  Ukraine,  Russia  and  Belarus.  Lack  of  supportive  legislation  and 
financing  mechanisms  for  implementation  of  EE  measures  in  residential  buildings 
challenge the participation of the ESCOs on the market. However, some positive changes 
in  legislation  in  Ukraine  and  Serbia  resulted  with  implementation  of  few  EE  projects 
based on ESCO model. 

Some  common  barriers  in  the  countries  for  the  ESCO  markets  in  the  residential  sector 
are the following:  

—  Low  energy  tariffs.  Although  in  the  last  years,  in  the  Western  Balkan  Countries, 
Ukraine,  Russia,  Belarus  and  Moldova  the  prices  for  electricity,  district  heating  and 
natural gas increased, they are still below the real market prices and subsided by the 
governments.  As  a  result,  longer  pay-back  periods  for  EE  projects  are  required  and 
investments in EE are less attractive. ESCOs have, hence, to conclude EPC with long 
contracting period (more than 10-15 years). 

—  Lack  of  consumption-based  billing  for  heating.  In  most  of  the  existing  buildings 
(constructed during the Soviet Period in Moldova, Ukraine, Russia and Belarus as well 
as during the former Yugoslavia time in Serbia, Bosnia and Herzegovina, Montenegro, 
the former Yugoslav Republic of Macedonia, Kosovo), metering of heat consumption is 
only  possible  with  installation  of  individual  heat  meters  on  each  radiator  because  of 
the  vertical  system  for  heat  distribution.  Nowadays,  the  heat  consumption  is 
measured  in  the  heat  substation  and  then  divided  per  apartment  per  square  meter. 
With  this  approach,  tenants  are  barely  driven  to  undertake  EE  projects  (World  Bank 
Group. 2014).  

—  Project  size  and  high  transaction  costs.  In  the  Western  Balkan  Countries,  Moldova, 
Ukraine, the share of private dwellings is above 90%. In 2010 in Moldova, 96% of the 
dwellings  were  private  and  only  4%  public  owned.  In  2011,  in  Ukraine,  95%  of  the 
dwellings  were  private  owned  and  only  5%  owned  by  state  or  local  governments. 
Single  family  houses  account  for  about  90%  of  the  total  number  of  buildings  in  the 
Western Balkan countries (e.g. in Serbia 89.6%, in Albania 84%). In Ukraine, Russia 
and  Belarus,  the  share  of  single  family  houses  on  total  number  of  buildings  is  much 
lower (e.g. in Ukraine is about 50%) (Panev et al. 2013). This "fragmented" structure 
of  building  stock  particularly  in  the  Western  Balkan  Countries  increases  the 
complexity  of  investment  in  EE  and  transaction  costs,  since  many  single  private 
clients and small sized projects are involved. 

—  Lack of established Homeowner association (HOA). HOAs are legal entities that could 
enter into contract with ESCOs, borrow money from Banks and open bank accounts. 
HOAs have the chance to ensure that any EE benefits are fairly distributed across all 
homeowners and that good behaviour in the energy consumption is rewarded (World 
Bank  Group.  2014).  Although  in  all  Western  Balkan  Countries  legislations  related  to 

24 

 
the  creation  of  Homeowner  associations  (HOA)  are  in  place  the  aforementioned 
practice  of  HOAs  has  not  spread  yet.  Therefore,  ESCOs  investment  in  EE  in  multi 
apartment buildings implies dealing with multiple owners and not with HOAs. 

Moreover, HOAs' creditworthiness and decision making process. In the countries (as e.g. 
the former Yugoslav Republic of Macedonia or Serbia) where the HOAs can be registered 
as legal entities, HOAs cannot borrow money from Commercial Banks, since they are not 
creditworthy. Other problem that occurs in multi apartment buildings is connected with a 
complicated decision making process. There are several countries in which according the 
legislation  related  to  maintenance  of  buildings,  51  percent  or  simple  majority  or  100 
percent  of  the  apartment  owners  have  to  agree  for  capital  investment  up-grade  (World 
Bank Group. 2014). 

—  “High  risk  perception.  Commercial  banks  often  consider  EE  investment  in  residential 
buildings  as  very  risky  operations  because  of  the  complex  ownership  structure  of 
buildings,  low  creditworthiness  of  HOAs  and  often  long  payback  period.  Therefore, 
they  are  reluctant  to  issue  loans  for  the  residential  sector  or,  in  case  the  loan  is 
issued, these show very high interest rates (World Bank Group. 2014). 

—  Lack  of  financing  and  incentive  schemes.  Initiating  investments  in  EE  in  residential 
buildings  requires  state  financing  and/or  incentive  schemas  Costs  for  energy  audits 
and  preparation  of  technical  documentation  for  building  renovation,  can  be  covered 
by state funds/grants or supported by state incentives (e.g. tax reduction). These will 
reduce  up  front  investments  for  ESCOs  and/or  for  building  owners  (World  Bank 
Group.  2014).  Nowadays,  all  countries  are  facing  a  lack  of  state  incentives  for  the 
residential  sector,  special  initiatives  are  active  for  EE  in  industry,  but  not  for 
residential sector. 

—  Lack  of  understanding  of  ESCO  concept.  Building/apartment  owners  are  not  familiar 
with ESCO concept, and therefore they are not aware of the benefit of the EE projects 
implemented through ESCOs. 

Some  recommendations  to  scaling  up  investment  in  EE  in  residential  buildings  were 
mentioned  in  the  Final  Report  “Western  Balkans  –  Scaling  Up  Energy  Efficiency  in 
Buildings”  prepared  by  World  Bank  Group.  These  recommendations  are  (World  Bank 
Group. 2014): 

—  Enforcement  legislation  for  HOAs  and  creation  of  HOAs.  Establishment  of  HOAs  as 
legal  entities  with  bank  accounts  will  enable  more  investments  in  EE  and  more 
involvement of ESCOs. Therefore, implementation of the existing legislation related to 
creation  of  HOAs  and  maintenance  of  residential  buildings  have  to  be  enforced.  In 
some  countries  as  e.g.  Bosnia  and  Herzegovina  legislation  for  maintenance  of 
residential buildings shall be adopted. 

—  Introduction  of  financing  and  incentives  schemas  for  the  residential  sector.  The 
introduction  of  dedicated  EE  funds  and  incentive  schemas  will  help  to  scale  up 
implementation  of  EE  projects  in  residential  sector.  Through  funding  programs  and 
incentives (e.g. tax incentives for EE equipment and materials) can be financed part 
of  EE  projects  as  e.g.  energy  audits,  preparation  of  pre  investment  studies  etc. 
Creation of an EE fund will enable ESCOs to obtain loans with lower interest rates or 
to obtain guarantee for loans from commercial banks. 

—  With  the  introduction  of  heat  metering  and  consumption  based  billing  in  the 
residential sector and particularly in multifamily buildings, EE measures will create the 
energy  cost  savings  cash  flows  from  which  EE  loans  can  be  repaid.  In  Albania, 
Montenegro, Kosovo only small numbers of buildings or single houses are connected 
to district heating. While in all other countries metering on apartment level has to be 
introduced  as  soon  as  possible.  Purchasing  of  metering  devices  can  be  financed  by 
the district heating companies, owners or through state funds. 

Several  residential  buildings  can  be  bundled  in  one  project  to  reduce  transaction  costs. 
This  is  possible  where  residential  buildings  are  owned  by  state  or  local  authorities.  In 

25 

 
particular in Ukraine, Moldova, Russia and Belarus lot of buildings were built in the soviet 
period (e.g. in Ukraine 76%). Since these buildings show similar characteristics, they can 
be classified according to the building type and constriction period This classification will 
enable  to  reduce  the  number  of  projects  developed.  Organization  of  awareness 
campaigns and public education on EE and ESCOs can provide a base level of information 
from  which  more  informed  decisions  can  be  made.  Information  programs  can  involve  a 
range  of  media,  from  utility  fliers  to  public  posters  to  radio/TV  spots  to  websites.  In 
particular, websites that gather the relevant information, contact details for financing and 
incentive programs, and advice for working through HOAs—can offer a simple “one-stop 
shop”  and  reduce  the  transaction  costs  associated  with  undertaking EE  implementation. 
It  will  attract  investments  in  EE  projects  from  private  sector  and  commercial  banks. 
International ESCOs will have interest to enter the huge markets in Russia, Ukraine and 
Turkey. 

26 

 
 
 
7  ESCOs in the industrial sector 

The  industrial  sector  is  particularly  important  for  energy  service  provider  (ESCOs)  in 
Turkey,  Ukraine,  Russia,  and  Belarus.  These  markets  have  huge  potential  for  EE  since 
their governmental energy policies and strategies focus on EE. 

The  Russian  market  is  huge  and  all  industrial  sectors  need  to  increase  their  energy 
efficiency. Few ESCOs are currently active in the Russian industrial sector. Since 2014 in 
the  industrial  sector  about  20  ESCO  projects  with  an  investment  volume  of  EUR  40-50 
million  have  been  implemented.  (ECEC,  2016)  “Electricity  is  one  of  the  major  items  of 
expenditure  of  any  industrial  enterprise.  Optimizing  electricity  consumption  will  help  to 
fulfil  the  main  task  of  achieving  a  substantial  reduction  of  overall  costs  and  to  increase 
the product’s competitiveness” (Smolnikov, 2015). 

The Turkish government is focusing on the industrial sector for the implementation of EE 
policies,  since  it  plays  a  key  role  in  the  fast  growing  Turkish  economy  (6th  biggest 
economy  in  Europe  and  the  annual  demand  increase  of  Turkey  is  around  4,6%  since 
1990.  It  is  expected  to  grow  to  5%  annually  to  2023)).  (Celikoglu  2015)    The  Turkish 
government has developed and implemented incentives schemas for the implementation 
of  the  “Energy  Efficiency  Projects  (VAP)”  in  industry.  Since  2000,  5  million  Turkish  lira 
(around  EUR  1.6  Million)  has  been  allocated  each  year  for  “Energy  Efficiency  Projects 
(VAP)” in industry. The EDV (ESCO) companies are involved in realization of different EE 
projects  mainly  in  large  industrial  enterprises.  They  use  standard  service  or  sales 
contracting.  Modified  EPC  were  used  only  by  a  few  ESCOs.  The  funding  is  provided  by 
ESCOs own equity or by the customers if they are large industrial enterprises. Third part 
financing is not very common since there are not attractive conditions in the credit lines 
from commercial banks. 

Nowadays, practically there is no ESCO market for the industrial sector in Ukraine. In the 
last 10 years, especially during the 2013-2015 period, Ukrainian industry lost its position 
on the market. Retrofitting projects are rarely implemented by the company owners, and 
in these cases, energy service companies are not involved (EC, 2016). 

 “In  Russia,  the  common  approach  to  increase  energy  efficiency  is  running  austere 
projects  with  short  payback  periods,  which  the  enterprise  is  able  to  implement  with  its 
own  available  resources.  Naturally,  such  projects  cannot  have  any  impressive  results.” 
(Smolnikov, 2015) 

In  Turkey,  Ukraine  and  Russia,  the  ESCO  market  in  the  industrial  sector  is  well 
established.  These  governments  may  also  focus  on  the  promotion  of  ESCO  industries in 
the  residential  and  the  commercial  sectors,  which  have  huge  energy  saving  potential. 
ESCOs  can  offer  a  range  of  services  providing  necessary  technical  skills  and  resources 
and facilitate access to financing. 

In the Western Balkan Countries the implementation of EE in industry is not the focus of 
governmental  policies,  since  these  markets  are  relatively  small  and  they  have  very 
limited energy saving potential in the industrial sector. Therefore, the interest of energy 
services providers and ESCOs to invest in EE projects in industrial enterprises is very low 
and the ESCO market is not well developed. 

In the industrial sector the main barriers that may jeopardise the implementation energy 
efficiency  are  financial.  However,  the  lack  of  motivation  (including  the  lack  of 
administrative incentives, tasks by increasing energy efficiency, low energy tariffs, lack of 
understanding of EE and ESCO model etc.) makes such EE projects not a priority for the 
industry sector (EC, 2016). 

The  public  sector  should  have  the  leading  role  in  the  promotion  of  energy  services  and 
ESCO  business  in  all  Western  Balkan  Countries.  Governments  can  stimulate  the  ESCO 
industry  trough  creation  of  favourable  conditions  for  investments  in  EE  projects.  They 
shall  adopt  legislative  and  regulatory  framework  to  remove  barriers  to  public 
procurement  of  energy  services.  Clear  regulations,  rules  and  procedures  will  build  the 

27 

 
trust  in  work  between  the  public  sector  and  ESCOs.  Providing  affordable  financing 
through  Energy  Efficiency  Funds  can  also  facilitate  investments  in  ESCO  projects. 
International  donor  organizations  and  financial  institutions  should  support  governments 
in  the  formation  of  ESCO  market.  International  ESCOs  can  bring  necessary  know-how 
and  experience  for  ESCO  business.  As  the  markets  for  energy  services  are  catalysed, 
ESCOs can extend activities to the industrial and commercial sectors. 

28 

 
8  References  

Energy Community. 2016. ANNUAL IMPLEMENTATION REPORT, 2015/2016. Available at: 
Energy Community web portalhttps://www.energy-community.org/implementation/ 

Limaye, Dili, Jas Singh, Kathrin Hofer. 2014. “ Scaling Up Energy Efficiency in Buildings in 
the  Western  Balkans  -  Establishing  and  Operationalizing  an  Energy  Efficiency  Revolving 
Fund” 
Bank  
http://documents.worldbank.org/curated/en/2014/05/19781937/scaling-up-energy-
efficiency-buildings-western-balkans-establishing-operationalizing-energy-efficiency-
revolving-fund-guidance-note 

Guidance 

prepared 

World 

Note 

for 

EBRD. 
http://www.ebrd.com/work-with-us/procurement/p-pn-150220b.html 

  2016.  European  Bank 

for  Reconstruction  and  Development-web  page 

Directive 2006/32/EC - EU 4 Energy end-use Efficiency and Energy Services ESD 

Directive 2012/27/EU Energy Efficiency Directive 

World Bank Group. 2014. Final Report “Western Balkans – Scaling Up Energy Efficiency in 
Buildings” 
http://documents.worldbank.org/curated/en/2014/06/19782698/western-
balkans-scaling-up-energy-efficiency-buildings-final-report 

NALAS. 2014.  Guidance note   “Scaling Up Energy Efficiency in Buildings in the Western 
for  World  Bank  Group 
Balkans  Municipal  Budgeting  and  Finance”  Prepared 
http://documents.worldbank.org/curated/en/2014/05/19790362/scaling-up-energy-
efficiency-buildings-western-balkans-municipal-budgeting-finance-guidance-note 

Smolnikov, Ivan. 2015. Article in “Energy and Industry in Russia” published in April 2015 
http://www.eprussia.ru/epr/649496/650495.htm 

Calikoglu,  Erdal.  2015.  “Resent  Development  in  the  EE  Policies  in  Turkey”  presentation 
held  on  the  “High  Level  Workshop  on  Effective  Energy  Policies,  New  Financing 
Instruments and ESCOs “ in Varese on 11.11.2015 

http://iet.jrc.ec.europa.eu/energyefficiency/node/9103 

29 

 
 
 
 
9  Development of the ESCO Market in Albania in 2015 

9.1  General overview of the market 

The  energy  service  market  in  Albania  is  at  its  early  stage.  No  significant  changes  have 
been  recorded  in  the  development  of  the  ESCO  market  during  the  period  2013  –  2015 
(ECEC, 2016) 

Small  private  companies  (e.g.  distributors  of  equipment),  that  provide  different  kind  of 
services  as  energy  audit,  installation  and  maintenance  of  equipment  for  heating  and 
cooling,  have  the  potential to  become  ESCOs.  However,  these  companies  need  capacity 
building programs to be able to provide a full range of energy services (ECEC, 2016) 

9.2  Legal framework  

The  new  Law  on  Energy  Efficiency  was  approved  in  November  2015.  This  law  replaced 
the  Law  on  EE  adopted  in  2005  and  it  is  complainant  with  the  Directive  2006/32/EC 
(ESD). The new Energy Efficiency Law includes necessary provisions for establishment of 
ESCO  market  in  Albania,  as  well  as  securing  financing  through  the  Energy  Efficiency 
Fund. The Law prescribes also requirement for public sector to purchase energy efficient 
equipment and appliances. (ECEC, 2016) 

The  EE  legislation  needs  to  be  completed  with  the  Law  on  Energy  Performance  of   
Buildings and by-laws that will make the legislation applicable (ECEC, 2016). The Energy 
Community noted in its Assessment of the first NEEAP that “One of the main reasons for 
low implementation of the 1st EEAP was the missing supportive legal framework, as well 
as the lack of dedicated funding”. (Energy Community 2014) 

Furthermore, Albania needs to improve and adopt the second NEEAP (the first draft was 
submitted  in  November  2013),  following  the  requirements  of  Directive  2006/32/EC  and 
the template developed by the Energy Community Energy Efficiency Coordination Group.  
(Energy  Community  2016)  The  2nd  NEEAP  envisages  further  implementation  of  Energy 
Efficiency  Law  and  puts  focus  on  development  of  ESCO  market  as  prerequisite  for 
implementation of measures in building sector, water-supply systems, public lighting and 
industry. (Energy Community 2014) 

In the 2nd NEEAP  financing mechanisms proposed including strengthening the role of EE 
Fund,  public  budget,  loans,  subsidies,  IFIs,  ESCO  financing  etc.  However,  sources  of 
financing were not clearly identified and presented. (Energy Community 2014) 

9.3  Barriers to the development of the energy service market 

The main barriers for the development of the ESCO market in Albania were identified as 
follow (ECEC, 2016EC, 2016): 

—  Legal:  There  is  no  specific  legislation  for  ESCO’s.  The  EE  legislation  needs  to  be 
completed with the Law on Energy Performance of  Buildings and the by-laws that will 
make the legislation applicable 

—  Financial:  There  are  no  convenient  sources  to  finance  the  activities  of  energy 
services. In Albania the banking system is facing issues with non-performing loans in 
the  last  three  years,  with  the  25%  of  their  total loan  portfolio  as  non-performing  or 
bad  loans.  This  pushes  the  banks  to  increase  the  interest  rates  and  to  add 
administrative  burdens  to  loan  applicants.  Moreover,  the  government  does  not  have 
subsidies  for  ESCO’s  and  does  not  promote  it  as  a  viable  mechanism  and  does  not 
incentivise EE neither at national nor at local level 

Other barriers that hamper development of the ESCO market are: (EC, 2016) 

—  Lack or reliable energy data from the consumers resulting from lack of monitoring, 

—  Lack of know-how on the market, 

30 

 
—  Lack of legal framework for the government entities to apply ESCO mechanism, 

—  Low confidence in the EE expertise by the big consumers, 

9.4  Recommendations to overcome the existing barriers 

To overcome the identified barriers some steps and activities shall be carried out: 

●  Full  transposition  and 

implementation  of  EU  directives 

into  Albanian 

legislation; 

●  Strictly future implementation of the legal framework on Energy Efficiency, EE 

Action Plan and Building Codes; 

● 

● 

 Incentives and financial supports for investments in EE; 

 ESCO penetration in the domestic market; 

●  Programs for EE on local (municipality) level; 

● 

 Awareness raising activities 

●  Raising  the  level  of  professional  capacities  on  EE  within  Ministry  of  Economy 
and  Industry  (MEI)  with  the  support  of  European  Commission,  through  KfW, 
EU, and other donors, such as USAID, GTZ, etc.; 

9.5  Energy services in the public sector 

In  the  draft  version  of  the  2nd  NEEAP  measures  for  public  sector  are  mentioned  , 
including the ones dealing with stricter standards for new public buildings, refurbishment 
programs,  promotion  of  public  street  lighting  and  SHW  systems,  information  and 
awareness  raising  campaign,  energy  labelling  and  minimum  standards  for  electric 
appliances (Energy Community 2014). 

Municipal spending on EE improvements in public buildings is still marginal compared to 
other  budget  items.  In  Albania  municipalities  accounted  for  a  total  of  €478  million  of 
investments  in  2013,  of  which  only  €92,600  were  dedicated  to  EE  improvements  (i.e., 
0.02 percent) (NALAS 2014) 

The barriers that hamper investments in EE and development of the ESCO market in this 
sector are: 

—  Limited number of creditworthy municipalities and borrowing capacity; 

—  Legal  Limitations  on  Municipal  Borrowing.  The  Maximum  ratio  of  net  operating 

revenues to total debt service is 1.4.; (NALAS 2014) 

—  Lack  of  multi  years  budgeting  in  municipalities  and  retention  of  energy  savings. 
Municipalities lack reserves or other means to carry over budget provisions from one 
year  to  the  next.  They  must  balance  their  annual  expenditures  with  revenues 
received  in  the  same  budget  year,  or  by  means  of  loans  taken  from  financing 
institutes  in  the  same  year.  Municipal  budget  rules  do  not  provide  for  any  internal 
accounting  mechanism  that  would  allow  for  the  direct  amortization  of  one  year’s 
investments using the next years’ additional revenues or energy savings. This applies 
also for EE investments in municipal public buildings. (NALAS 2014) 

—  Lack  of  Separate  Accounts  for  Capital  and  Operating  Expenditures.  In  their  budget 
plans,  municipalities  may  not  foresee  the  transfer  of  a  surplus  from  their  operating 
budget to their capital budget, and vice-versa. If EE investments generate savings on 
a  municipality’s  energy  bill,  the  saved  operating  funds  may  remain  unused  if  they 
cannot  be  transferred  to  the  capital  budget  (which  would  require  prior  national 
government  approval).  Further,  the  saved  amount  is  usually  deducted  from  the 
operating budget approved by the national government in future years, since budgets 
are often based on the prior year’s actual expenditures (NALAS 2014). 

31 

 
—  Lack  of  budget  autonomy.  The  municipalities  depend  on  state  budgets  for  their 
operational  budgets,  future  energy  savings  would  result  in  a  deduction  from  their 
operational  budgets,  and  the  saved  energy  cost  cannot  be  used  for  other  local 
purposes—creating a huge disincentive to save energy. In Albania, local governments 
receive more than 40 percent of their revenues from conditional or earmarked grants 
from their national governments. Therefore, the central government has high control 
over local budgets (NALAS 2014) 

—  Short-Term Perspective of Local Political Decision Makers. The office's term of mayors 
and  councils  in  Albania  is  three  years.  Therefore  they  are  usually  focused  on 
implementation  of  visible  and  tangible  projects  for  their  voters  within  their  office 
term,  to  improve  their  chances  of  being  re-elected.  Therefore,  6-8  year  payback 
periods for EE investments, are usually not compatible with the investment horizons 
of local politicians (NALAS 2014) 

—  Complex public procurement procedures; 

—  Lack  of  model  for  EPC  and  standardized  procedures  for  public  tendering  of  energy 

services; 

—  Small project sizes, leading to high project development and transaction costs); 

Some  of  the  potential  solutions  to  overcome  above  mentioned  barriers  are:  (NALAS 
2014) 

—  Integration  of  EE  investments  into  Medium-Term  Expenditure  Frameworks  (MTEFs) 

with rolling three-year budgetary plans (EU); 

—  Reclassifying  EE  investments  as  utility  services,  where  long-term  contracts  are 

implicitly allowed; 

—  Fiscal decentralization and more budget autonomy for municipalities; 

—  Increased local revenue sources; 

—  Obligations  to  develop  and  implement  Municipal  EE  Action  Plans  (MEEAPs)  or 

Sustainable Energy Action Plans (SEAPs); 

—  Grants for energy audits and bundling of public projects at municipal level to reduce 

transaction costs; 

—  Standardization  of  documentation  and  procedures  for  public  procurement  of  EE 

equipment and services; 

9.6  Energy services in the residential sector 

The  residential  sector  in  Albania  has  high  energy  saving  potential,  since  the  majority  of 
the existing building stock is obsolete. Moreover, high energy consumptions are recorded 
for electricity in this sector (49% for 2008) (NEEAP. 2011) 

The  primary  policy  that  enables  creation  of  Homeowner  Associations  (HOA)  is  in  place, 
but  must  be  enforced.  The  “Regulation  on  Management  of  Buildings”  has  to  be 
implemented.  Illegal  buildings  (10-15%  of  multi-owner  buildings)  and  non-payment  of 
utilities are core issues in the Albanian residential sector. 

In addition this sector also faces a number of barriers hampering these Energy Efficiency 
investments. The key barriers are (World Bank. 2014): 

—   small project size and therefore relatively high transaction costs;  

—  low energy tariffs (especially for electricity). 

—  perception of high risk by commercial banks. 

—  relatively high commercial bank interest rates; and 

—  maintenance of buildings not regulated by legislation. 

32 

 
9.7  Energy services in the industrial sector 

The  energy  consumption  in  the  industry  sector  will  be  developed  as  a  result  of  the 
industrial  development  that  will  occur  in  the  upcoming  year.  The  Industry  Sector 
accounts for approximately 13% of total final energy consumption. The largest consumer 
of  energy  in  industry  is  food  and  beverage  19.9%,  the  building  materials  sector  by 
18.6%, followed by chemicals 15.4 %, ore-extraction industry 12.5%, etc. This sector is 
expected  to  play  a  great  role  in  the  economic  growth,  employment  and  living  standard 
(NEEAP 2011) 

9.8  Conclusions 

The  approval  and  enforcement  of  EE  legislation,  implementation  of  the  new  Law  on 
Energy  Efficiency,  adoption  of  the  second  NEEAP  and  preparation  of  the  3th  NEEAP  will   
create  energy  investment-friendly  conditions,  including  obligation  to  conduct  energy 
audits,  national  evaluation  of  energy  saving  potentials.  The  establishment  of  Energy 
Efficiency  Fund  will  contribute  essentially  to  the  implementation  of  EE  policies. 
Institutional  framework  for  EEAP  implementation  should  be  further  developed  and 
strengthened,  with  clearly  defined  roles  and  responsibilities  for  EEAP  implementation 
(ECEC, 2016) 

Low interest loans for EE measures provided by IFIs for domestic commercial banks will 
make investment in EE interesting for both ESCO and the consumers. Incentives and/or 
subvention  for  energy  audits  of  larger  energy  consumers  shall  be  introduced  by  the 
Government.  Creation  of  an  EE  Fund  can  improve  investment  in  EE,  especially  in  the 
public sector. (ECEC, 2016) 

9.9  References 

Energy  Community.  2014.  “Assessment  of  the  2nd  Energy  Efficiency  Action  Plans” 
https://www.energy-
community.org/portal/page/portal/ENC_HOME/DOCS/3500148/0926ED3AD1C5409CE05
3C92FA8C0E6A4.PDF 

Energy  Community.  2016.      Energy  Community  web  portal:    https://www.energy-
community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Implementation/Bosnia
_Herzegovina/Energy_Efficiency 

NALAS. 2014. “Scaling Up Energy Efficiency in Buildings in the Western Balkans Municipal 
Budgeting 
Bank 
http://www.worldbank.org/content/dam/Worldbank/Event/ECA/GN%20muni%20budget
%20final.pdf 

for  World 

Guidance 

prepared 

Finance” 

Note 

and 

World  Bank.  2014.  Final  Report  ”Western  Balkans:  Scaling  Up  Energy  Efficiency  in 
http://documents.worldbank.org/curated/en/2014/06/19782698/western-
Buildings” 
balkans-scaling-up-energy-efficiency-buildings-final-report 

NEEAP.  2011.  National  Energy  Efficiency  Action  Plan  2010  –  2018  https://www.energy-
community.org/portal/page/portal/ENC_HOME/DOCS/1138177/0633975AB4E57B9CE053
C92FA8C06338.PDF 

Contacted Experts - Survey respondents: 

Aheron Hizmo, GIZ ORF EE, Tirana, Albania 

33 

 
10 Development of the ESCO Market in Bosnia and 

Herzegovina in 2015 

10.1  General overview of the market 

The energy service market in Bosnia and Herzegovina (BiH) is still at a very preliminary 
stage.  Currently,  there  have  not  been  significant  changes  in  the  development  of  the 
ESCO market in BiH in last two years (2014 – 2015) (ECEC, 2016) 

It  is  difficult  to  estimate  the  number  of  ESCOs  in  Bosnia  and  Herzegovina,  since  the 
companies which provide energy services are mostly and, therefore, energy services are 
seldom their core business. Moreover, these companies are not registered as ESCOs. The 
number of ESCOs in 2016 in Bosnia and Herzegovina was less than 10 and there were no 
significant changes from the report of 2013 (ECEC, 2016). 

ESCOs in Bosnia and Herzegovina are mostly small private companies (small enterprises) 
mainly involved in some other similar businesses (ECEC, 2016). 

Most  of  the  projects  developed  by  these  ESCOs  are  connected  to  heat  energy  supply: 
about  50  projects  with  50  MW  of  installed  power,  mostly  for  heat  energy  production 
and/or without CHP plants. The most of these projects were implemented as fuel switch 
model  (from  fuel  oil  to  biomass)  and  mostly  realized  in  the  public  sector  (health  and 
education institutions) and partially service sector (ECEC, 2016). 

As  it  is  officially  known,  there  are  no  EPCs,  all  the  contracts  concluded  as  ESCs.  Some 
EPCs are in preparation, mostly regarding the improvement of performances in the public 
street  lighting.  Actually,  some  house  management  companies  (companies  dealing  with 
the management of department buildings) realized small contracts as EPCs, but there is 
no evidence on that (ECEC, 2016). 

10.2  Legal framework 

Republika Srpska adopted the Law on Energy Efficiency and the Energy Efficiency Action 
Plan  (EEAP),  while  in  the  Federation  of  Bosnia  and  Herzegovina  the  Law  on  Energy 
Efficiency  is  still  awaiting  adoption  (since  September  2014).  In  the  absence  of  a  full 
package  of  primary  and  secondary  legislation  transposing  the  Directive  2006/32/EC  in 
each  entity  and  the  Brcko  District,  as  well  as  the  adoption  of  a  state-level  EEAP  and 
changes in the state-level Law on Public Procurement to include energy efficiency criteria, 
Bosnia and Herzegovina still fails to comply with the Directive (Energy Community 2016). 

Three  regulations  came  into  force  in  Bosnia  and  Herzegovina’s  entity  Republika  Srpska, 
setting  the  minimum  energy  performance  requirements  for  buildings,  as  well  as 
implementing  schemes  for  energy  audits  and  energy  certification  of  buildings.  (Energy 
Community 2016) 

10.3  Barriers for the development of the energy service market 

The main barriers for the development of the market for energy services in BiH are: (EC) 

—  Legal:  The  process  of  the  adoption  of  the  complete  legislation  for  ESCOs  has  to  be 
finished.  ESCOs  are  mentioned  in  the  laws  on  energy  efficiency  of  both  entities  in 
Bosnia and Herzegovina (FBiH and RS), but the secondary legislation is not adopted. 
Apart  from  that,  some  changes  and  addition  are  needed  in  existing  legislation, 
especially regarding the public procurement. 

—  Financial:  There  are  no  convenient  sources  to  finance  the  activities  of  energy 
services. It means, there are no special credit lines for financing energy services. The 
interest rate from commercial banks on existing credit lines for SME, are too high. Of 
course, the credit rating of Bosnia and Herzegovina is one of the reasons for that. In 
addition there are no state incentives for EE. The absence of Funds and programs for 
financing EE in municipalities significantly reduces the potential of the companies. 

34 

 
Moreover, some other barriers hinder the further development of ESCO market in Bosnia 
and Herzegovina:  

—  lack of know-how of companies that would like to work as ESCO; 

—  lack of trust amongst potential contractors of ESCO and/or EPC model; 

—  lack of energy data (energy statistics is still at sufficient level, especially on biomass 

sources and consumption); 

—  lack of monitoring of energy consumption (there is no individual metering system in 
any  of  district heating system,  apart  from  some  heat  metering  at  service  and  public 
sector connected to district heating systems; 

—  the low price of electricity  demotivates investments in EE projects; 

—  the  lack  of  possibility  for  apartment  owners  in  multi  apartment  buildings  to  control 

and manage their consumption; 

—  the  unclear  structure  of  the  state  with  undefined  responsibility  regarding  the  energy 

sector, but other sectors too. 

10.4  Recommendations to overcome the existing barriers 

Most of the barriers have to be removed by authority (legislation, establishment of clear 
road  map  for  the  development  of  ESCOs,  etc.).  Law  for  EE  is  not  sufficient  for  the 
implementation of EE through ESCOs and therefore secondary legislation and procedures 
for  public  procurement  of  energy  services  has  to  be  developed.  EPC  contracts  for 
implementation  of  energy  services  in  municipality  buildings  and  public  lighting,  already 
prepared  in  the  framework  of  REEP  EBRD  program,  have  to  be  adopted.  A  legal 
framework that allows municipalities to establish long-term contracts should be prepared. 
The  development,  implementation,  monitoring,  and  regular  updating  of  local  EE  action 
plans  –  SEAPs  has  to  be  ensured  by  local  authorities.  Earmarking  of  funds  provided 
through  national  EE  funds  for  municipalities  and  establishment  of  specific  national 
support  programs  for  EE  in  municipalities  can  stimulate  the  energy  service  market,  as 
well as the establishment of national support programs for the setup and implementation 
of ESCO models in municipal public buildings and services. 

Capacity  building  programs  and  events  such  as  workshops,  for  the  national  and  local 
public  authorities  have  to  be  developed  and  organized.  In  the  same  time  capacity 
building programs for potential ESCOs should be implemented. 

10.5  Energy services in the public sector 

Energy Efficiency projects implemented on the basis of EPC model in BiH are still missing.  
In  some  public  utility  companies  (heat  suppliers)  projects  based  on  ESC  have  been 
implemented. 

Some  of  the  barriers  that  hamper  the  implementation  of  EPC  in  public  sector  (buildings 
and street lighting) are (World Bank 2014, Barnett 2013): 

—  Limitation of multiyear budgeting (up to 3 years). 

—  In Federation of BiH (FBiH) EPC investments and payment obligations are treated as a 

public debt. In the PPP Law of Republika Srpska (RS) it is not clear. 

—  Unclear  regulation  in  Federation  of  BiH  (FBiH)  or  not  regulated  in  (RS)  whether 
individual EnPC projects do not require up-front feasibility studies but the concept as 
such is admissible and can be tendered on basis of walk through audits. Bigger issue 
is EPBD audit rules may preclude ESCO to carry out own audit. 

—  Lack  of  model  EPC  and  standardized  procedures  for  public  tendering  of  energy 

services. 

35 

 
The  European  Bank  for  Reconstruction  and  Development  (EBRD)  has  developed  the 
regional project REEP (Regional Energy  Efficiency Program) since 2013. One component 
of the project is the support to preparation of ESCO projects in municipalities. Within this 
project’s  component,  the  EBRD  has  prepared  the  detailed  model  of  the  contract  for 
energy  services  (EPC)  for  buildings  and  street  lighting,  and  support  the  development  of 
two  ESCOs  projects  (the  hospitals  in  Zenica  and  Mostar,  FBiH).  The  mentioned  ESCOs 
projects  are  still  under  development,  and  this  process  goes  very  slowly,  amongst  other 
reasons due to abovementioned barriers. 

10.6  Energy services in the residential sector 

The residential sector also faces a number of barriers hampering these Energy Efficiency   
investments. The key barriers are: (World Bank. 2014) 

—  small project size and therefore relatively high transaction costs; 

—  low energy tariffs (especially for electricity); 

—  perception of high risk by commercial banks; 

—  HOAs’ decision-making processes is complicated and they have low creditworthiness; 

—  lack  of  heat  metering  devices  installed  in  multi  apartment  buildings  (norm-based 
billing systems for heating)- the owners are not motivated to invest in energy saving;  

—  relatively high commercial bank interest rates; and 

—  high discount rates (or hurdle rates) on the part of residential. 

10.7  Energy services in the industrial sector 

ESCO  projects  are  not  developed  in  the  industrial  sector.  Management  of  industrial 
enterprises is not interested in investment in EE, because of the lack of information and 
understanding for energy services, and the lack of confidence in ESCO business. 

10.8  Conclusions 

The  draft  Energy  Efficiency  Law  and  the  draft  EEAP  in  the  Federation  of  Bosnia  and 
Herzegovina should be adopted without any further delay. Finally, a state-level EEAP and 
amendments to the State Law on Public Procurement in order to include energy efficiency 
criteria need to be adopted. The coordination between authorities at the entity and state 
levels needs to be improved as a precondition for further energy efficiency progress and 
for the development of the energy service market. A state-level structure for monitoring 
and reporting on the implementation should be established and adequately sourced with 
funds and personnel. 

10.9  References 

Energy  Community,2016.  Energy  Community  web  portal:  https://www.energy-
community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Implementation/Bosnia
_Herzegovina/Energy_Efficiency 

World  Bank.  2014.  Final  Report  ”Western  Balkans:  Scaling  Up  Energy  Efficiency  in 
Buildings” 
http://documents.worldbank.org/curated/en/2014/06/19782698/western-
balkans-scaling-up-energy-efficiency-buildings-final-report 

Contacted Experts - Survey respondents: 

Semin Petrovic, IGT R&D Centre of Gas Technology, Sarajevo, BiH 

36 

 
 
 
 
11 Development of the ESCO Market in Kosovo5 in 2015 

11.1  General overview of the market 

EC, 2016There is no ESCO companies in Kosovo*. However, in the last few months there 
have  been  some  indications  for  ESC  market,  where  companies  have  approached  the 
Municipalities  in  particular  for  investments  in  the  Street  Lighting.  However,  due  to  the 
weak or unregulated legal framework for ESCO contracting the process is not feasible yet 
(EC, 2016). 

11.2  Legal framework 

As  a  Contracting  Party  of  the  Energy  Community  Treaty,  Kosovo  institutions  have  to 
transpose  the  third  energy  package  and  adopt  the  EU  acquis  on  energy  efficiency  and 
renewable energy. 

The  Kosovo  National  Energy  Efficiency  Action  Plan  (NEEAP)  is  a  basic  document  for  the 
implementation of Kosovo’s policies on energy efficiency. Kosovo’s NEEAP (2010 – 2018) 
was  approved  by  the  Ministry  of  Economic  Development  on  September  30th,  2011. 
Kosovo’s  second  National  Energy  Efficiency  Action  Plan  (hereinafter  –  2nd  NEEAP)  has 
been prepared on the basis of Article 10 of the Law on Energy Efficiency. It was adopted 
in December 2013. 

With  the  adoption  of  the  Law  on  Energy  Efficiency  in  2011,  Kosovo  made  a  significant 
progress  towards  the  creation  of  an  appropriate  legislative  and  institutional  framework 
for  energy  efficiency.  The  Law  on  Energy  Efficiency  transposes  the  key  requirements  of 
Directive  2006/32/EC  and  sets  the  legislative  and  institutional  framework  for  the 
implementation of the energy efficiency policy in Kosovo. It sets the legal basis for future 
development/amendment of secondary legislation. 

The  Law  on  Energy  Efficiency  stipulates  the  development  of  energy  efficiency  plans, 
obligatory energy  efficiency measures in the public sector,  energy management,  energy 
auditing and determines the role of different organizations dealing with energy efficiency. 
Amendments  to  this  Law  are  planned,  with  the  objective  to  improve  the  incentives 
scheme for energy efficiency measures and to introduce stricter penalty provisions.  

Financing of energy efficiency projects suffers from the lack of developed framework for 
innovative  financial  mechanisms,  including  the  setting  up  of  the  Energy  Efficiency  Fund 
stipulated  in  the  Law,  and  the  development  of  the  market  for  energy  services  and 
operation of energy service companies (ESCOs). 

Based on the Law on Energy Efficiency, the Kosovo Agency for Energy Efficiency (KEEA) 
was  established  and  its  core  staff  appointed  in  April  2012.  KEEA  is  responsible  for  the 
preparation of NEEAP, for the progress reports and for the development of the system for 
monitoring  and  verification  of  the  achievements  of  the  indicative  energy  saving  targets 
(Energy Community 2014). 

A  Draft  Law  on  Energy  Performance  of  Buildings  was  developed  under  the  Regional 
Energy  Efficiency  Programme  (REEP),  funded  by  the  European  Commission  -  Western 
Balkans  Investment  Framework  and  implemented  by  EBRD  and  the  Energy  Community 
Secretariat.  It  was  submitted  to  the  Kosovo  authorities  on  6  February  2015.  The  law 
would  transpose  the  Energy  Community  acquis  on  the  energy  performance  of  buildings 
(Directive 2010/31/EU). 

The amendments to the Law on Public Procurement of 2011 introduced energy efficiency 
criteria in the procurement of energy efficient equipment and vehicles, in line with Annex 
VI  of  Directive  2006/32/EC.  However,  there  is  no  secondary  legislation  in  place. 

5  *This  designation  is  without  prejudice  to  positions  on  status,  and  is  in  line  with  UNSCR  1244  and  the  ICJ 
Opinion on the Kosovo declaration of independence 

37 

 
                                           
Secondary  legislation  on  financing  instruments,  metering  and  informative  billing,  ESCO 
etc. still needs to be adopted for full compliance. 

11.3  Barriers to the development of the energy service market 

The  main  barriers  for  the  development  of  the  market  for  energy  services  in  Kosovo  are 
(EC, 2016): 

—  Legal:  There  is  not  a  secondary  legislation  related  EE  Law  (based  on  Directive 
2006/32/EC)  in  place.  Secondary  legislation  on  financing  instruments,  metering, 
informative billing, ESCO’s, etc. still needs to be adopted for full compliance. (Energy 
Community  2016)  Both  types  of  energy  service  contracts  (EPC  and  ESC)  are  not 
applicable in Kosovo. According to the current legal framework the PPP or negotiated 
contract  can  be  applicable.  This  creates  a  limitation  for  EPC,  or  ESC  contracting  (EC 
JRC, 2016). 

—  Financial:  High  interest  rates  from  banking  sector.  The  commercial  banks  perceive 
Investments  in  EE  as  a  risky  business  since  they  do  not  have  experience  on  how  to 
evaluate  EE  projects.  There  are  not  financial  incentive  scheme  on  national  or  local 
level to support such investments (EC JRC, 2016). 

Other barriers that hamper development of the ESCO market are (EC, 2016): 

—  Lack  of  a  comprehensive  and  reliable  EE  data  base  for  Kosovo.  Poor  quality  of  data 

leads to poor decision making which in turn results in ineffective investments. 

—  Lack of know-how for the ESCO. 

—  Low confidence of the potential consumers in the EE services. 

—  Energy efficiency is not a priority for the Mayors: larger cost savings can be achieved 
elsewhere  in  the  Municipal  Budget  and  focus  on  other  priorities  (e.g.  waste 
management); 

—  Lack of internal expertise in financial and project management. 

—  Insufficient EE expertise and resources at municipal level. 

—  High  transaction  cost  for  the  preparation  of  EE  and  ESCO  projects  (in  funds  and 

time). 

11.4  Recommendations to overcome the existing barriers 

Some steps and activities shall be carried out to address some gaps: (EC, 2016) 

●  Full  transposition  and  implementation  of  EU  directives  into  Kosovo  legislation 

(adoption of the legal framework for Energy Efficiency and ESCO);  

●  Strictly future implementation of the legal framework on Energy Efficiency, EE 

Action Plan and Building Codes; 

● 

Incentives and financial supports for investments in EE; 

●  Preparation of EE programs and projects based on ESCO model for EE on local 

(municipality) level; 

●  Awareness  raising  activities  and  promotion  of  ESCO  services  in  the  domestic 

market; 

●  Capacity  on  EE  within  Ministry  of  Economy  and  Industry  (MEI)  and  Energy 
Agency  of  Kosovo  with  the  support  of  EU    and  IFIs  as  EBRD  and  KfW,  and 
other donors, such as USAID, GTZ, etc.; 

●  Capacity building for energy  professionals and potential ESCOs; 

● 

Implementation  of  energy  audits  and  energy  management 
enterprises; 

in 

larger 

38 

 
●  Preparation and implementation of EE pilot projects based on ESCO model; 

11.5  Energy services in the public sector 

Kosovo*  is  already  implementing  renovation  programs  for  buildings  (especially  public 
buildings  to  promote  the  leading  example  of  the  public  sector).  Numerous  projects  are 
running at the moment: 

—  EU  funded  project  for  the  renovation  of  60  schools  and  three  hospitals  –  3  year 

Projects, was foreseen to be finalized 2016. 

—  World Bank  project – implementation of EE measure in central government buildings 

—  The  Kosovo  Sustainable  Energy  Project  (KoSEP)  –  developed  by  the  European  Bank 
for Reconstruction and Development (EBRD) – supports energy efficiency investments 
and  renewable  energy  development  in  the  residential,  commercial,  industrial  and 
agricultural  sectors  by  providing  tailor-made  loan  products,  free  of  charge  technical 
assistance and investment grants. 

A World Bank’s 2013 National Building Energy Efficiency Study for Kosovo calculated the 
total  energy  expenditures  in  Kosovo  for  all  of  their  public  buildings  as  €33.96  million, 
which would be equivalent to almost €20 per inhabitant and to about 9.5 percent of total 
municipal  revenues  in  Kosovo,  which  were  €352.4  million  in  2012.  While  the  share  of 
goods and services (including energy) in the municipalities’ total expenditures accounted 
for only 9 percent of the overall expenditures of municipalities in 2012. 

“Municipal energy efficiency action plans (MEEAPs)—as required by the EE law in Kosovo, 
are similar to the concept of SEAPs promoted by the Covenant of Mayors in Europe. Each 
MEEAP, approved by a local council, includes a prioritized list of EE and renewable energy 
projects; this list then provides a basis for negotiations with national government as well 
as with the private sector and with IFIs”(NALAS,2014). 

Although in Kosovo there are no legal barriers preventing municipalities from concluding 
ESCO  contracts,  developing  a  reliable  calculation  of  ESCO  fees  on  the  basis  of  achieved 
energy savings is seen by the municipalities as a major challenge. 

Other  barriers  that  hamper  investments  in  EE  and  in  the  development  of  the  ESCO 
market in Kosovo are: 

—  Limited  number  of  creditworthy  municipalities  and  limitation  on  borrowing;  The  Law 
on  public  borrowing  imposes  various  restrictions  on  municipalities’  ability  to  borrow 
money, principally the need to have two consecutive years of unqualified accounts. As 
municipalities  were  unable  to  borrow  in  the  past  they  have  no  credit  history  for  the 
banks  to  evaluate.  This  is  because  municipalities  in  Kosovo  may  not  incur  any  debt 
unless  they  have  received  unqualified  audit  opinions  from  the  Office  of  the  Auditor 
General  as  part  of  the  mandatory  annual  audits  for  at  least  the  previous  two  years. 
(NALAS 2014, World Bank 2013) 

—  Limitation on multiyear budgeting. The contract has a maximum duration of 3 years, 
so three year budgeting max it's allowed for public institutions to enter into a contract 
(EC, 2016). 

—  A lack of experience even for PPP or negotiated contract. The only way for contracting 
it’s  through  public  procurement  contracts  with  max  duration  of  3  years.  Time 
limitation increases the complexity of this issue. 

—  Budgetary  rules  do  not  allow  municipalities  to  benefit  from  any  energy  savings  they 
achieve  in  the  longer  term  –  each  year’s  budget  allocation  is  based  on  the  previous 
year’s  outturn  and  energy  savings  cannot  be  used  for  investment  purposes  (World 
Bank 2013, NALAS 2014, and 2nd NEEAP of Kosovo). 

—  Lack  of budget autonomy. The municipalities in Kosovo depend on state budgets  for 
their  operational  budgets,  future  energy  savings  would  result  in  a  deduction  from 
their  operational  budgets,  and  the  saved  energy  cost  cannot  be  used  for  other  local 

39 

 
purposes—creating a huge disincentive to save energy. In Kosovo, local governments 
receive more than 40 percent of their revenues from conditional or earmarked grants 
from their national governments. Therefore, the central government has high control 
over local budgets (NALAS 2014). 

—  Municipal decision making is restricted by mandatory expenditures imposed on them 
by national law. This has a strong influence on the structure of local expenditures. In 
Kosovo,  the  municipalities  must  pay  the  full  cost  of  preschools,  primary  schools, 
secondary  schools,  and  primary  health  clinics,  wages  and  salaries  consume  59 
percent of overall municipal expenditures (NALAS 2016). 

—  Complex  public  procurement  procedures.  The  Law  on  Public  Procurement  should 
ensure that the process for evaluating government tenders takes into account any EE 
related benefits that a particular proposal will deliver. 

—  Lack  of  EPC  models  and  standardized  procedures  for  public  tendering  of  energy 

services.  

—  Small project sizes, leading to high project development and transaction costs). 

Some of the potential solutions to overcome above mentioned barriers are(NALAS 2014):  

—  Reclassifying  EE  investments  as  utility  services,  where  long-term  contracts  are 

implicitly allowed. 

—  Fiscal decentralization and more budget autonomy for municipalities. 

—  Increased local revenue sources. 

—  Obligations  to  develop  and  implement  Municipal  EE  Action  Plans  (MEEAPs)  or 

Sustainable Energy Action Plans (SEAPs). 

—  Grants for energy audits and bundling of public projects at municipal level to reduce 

transaction costs. 

—  Standardization  of  documentation  and  procedures  for  public  procurement  of  EE 

equipment and services. 

11.6  Energy services in the residential sector 

The  greatest  potential  for  energy  savings  -  almost  75%  of  the  total  -  lies  in  the 
Residential sector, followed by the Private/Commercial sector at 17%. More than half of 
the Kosovo building stock was constructed in the period 1970 to 1985, which is reflected 
in  the  relatively  high  specific  heat  consumption  of  these  buildings.  The  current  level  of 
heat consumption in Kosovo is estimated to be about 219 kWh/m2 year, compared to 80–
150  kWh/m2  year  in  Western  Europe,  which  indicates  that  there  is  a  significant 
opportunity for EE improvements (2nd NEEAP of Kosovo 2013). 

Since 2000, a large number of ‘illegal’ buildings have been constructed in Kosovo without 
the required building permits. As a result, building energy performance standards are not 
enforced  or  monitored,  often  resulting  in  excessive  energy  consumption  (2ND  NEEAP  of 
Kosovo,  2013).  Therefore  policies  to  address  the  problem  of  illegal  buildings  and 
unpayment of utilities shall be enacted and implemented. 

This  sector  also  faces  a  number  of  barriers  hampering  these  Energy  Efficiency   
investments. The key barriers are (EC, 2016, 2nd NEEAP of Kosovo): ECEC, 2016b 

—  Lack  of  secondary  legislation  to  promote  the  establishment  of  Homeowner 
Associations  (HOAs)  and  current  structures  to  deal  with  refurbishment  of  multi 
apartment buildings. Maintenance of buildings not regulated by legislation; 

—  Small project size and therefore relatively high transaction costs; 

—  Inefficient energy pricing: electricity and heat tariffs are not yet fully cost-reflective,  

tariffs are subsidized and  some inefficient tariff structures persist; 

40 

 
—  Lack  of  affordable  EE  financing  schemes  for  lower  income  households  unable  to 

access the loan market; 

—  Perception of high risk by commercial banks; 

—  Relatively high commercial bank interest rates; 

—  Poor or lack of energy consumption data. 

The establishment of effective Homeowner Associations that have legal status in order to 
open bank accounts borrow money for building improvements; enter into contracts with 
service  providers.  This  will  contribute  to  faster  penetration  of  energy  services  in  the 
residential  sector  in  Kosovo.  Implement  Financing  and  Incentive  Schemes  for  Family 
Houses will stimulate the investment in EE. (World Bank 2014) 

11.7  Energy services in the industrial sector 

Industry is the third largest energy end-use sector in Kosovo. In 2012, energy end-use in 
the industry sector was 290.68 ktoe or 23.04% of total energy end-uses consumption. 

There are several barriers in addition of above mentioned barriers in the industrial sector 
of Kosovo: 

—  Low  awareness  for  EE  and  energy  services  among  the  management  in  industrial 

enterprises, 

—  Lack of expertise and experts for EE and energy services in industrial enterprises; 

—  Low priority of investments in EE among Kosovo industrial enterprises; 

—  No legal obligations for improvement of EE. 

11.8  Conclusions 

Kosovo made significant progresses during the reporting period 2013/2015, in particular 
with  the  adoption  of  the  second  EEAP.  The  priority  for  Kosovo  remains  the  adoption  of 
the missing secondary legislation under the Energy Efficiency Law of 2011. This includes 
the  development  of  new  financing  instruments  (including  EE  Fund)  and  a  national 
framework  supporting  ESCOs,  the  preparation  of  local  plans  and  the  strengthening  of 
inter-institutional  cooperation.  Secondary  legislation  to  support  the  ESCO  contracting 
framework  would  need  to  be  prepared,  as  required  by  the  Law  on  Energy  Efficiency,  to 
provide  an  enabling  environment  for  the  uptake  of  ESCO  business.  In  addition,  there  is 
the  need  of  some  changes  in  legislation  related  budgeting,  borrowing  from  financial 
institutions  and  accounting  of  energy  savings  municipalities  to  provide  an  enabling 
environment for the uptake of ESCO business. 

Timely finalization and adoption of primary and secondary legislation on energy efficiency 
in buildings and procurement are a priority for implementation of the planned measures 
under the EEAP as well as to stimulate development of the ESCO market. 

11.9  References 

Energy  Community,  2014.  “Assessment  of  the  2nd  Energy  Efficiency  Action  Plans” 
https://www.energy-
community.org/portal/page/portal/ENC_HOME/DOCS/3500148/0926ED3AD1C5409CE05
3C92FA8C0E6A4.PDF 

Energy  Community,  2016.  Energy  Community  web  portal:    https://www.energy-
community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Implementation/Bosnia
_Herzegovina/Energy_Efficiency 

NALAS. 2014. “Scaling Up Energy Efficiency in Buildings in the Western Balkans Municipal 
Budgeting and Finance” Guidance Note prepared for World Bank 

41 

 
http://www.worldbank.org/content/dam/Worldbank/Event/ECA/GN%20muni%20budget
%20final.pdf 

World  Bank,  2014.  Final  Report  ”Western  Balkans:  Scaling  Up  Energy  Efficiency  in 
Buildings” 
http://documents.worldbank.org/curated/en/2014/06/19782698/western-
balkans-scaling-up-energy-efficiency-buildings-final-report 

NEEAP,  2011.  National  Energy  Efficiency  Action  Plan  2010  –  2018  https://www.energy-
community.org/portal/page/portal/ENC_HOME/DOCS/1138177/0633975AB4E57B9CE053
C92FA8C06338.PDF 

Contacted Experts - Survey respondents: 

Aheron Hizmo, GIZ ORF EE, Tirana, Albania 

42 

 
 
 
12 Development of the ESCO Market in Moldova in 2015 

12.1  General overview of the market 

Like  the  other  countries,  the  ESCO  market  in  Moldova  is  at  an  early  stage  of 
development.  The  main  reason  characterizing  the  current  situation  is  the  high  cost  of 
capital,  low  prices  for  energy  resources  and  lack  of  incentives  for  developing  the  ESCO 
market  (EC  JRC  Survey  2016).  However,  in  2014-2015  some  positive  changes  in  the 
energy services market have occurred. 

Since 2014, the ESCO Moldova project (6) has facilitated the development of a functional, 
sustainable  and  efficient  market  of  the  Energy  Service  Companies  (ESCO)  in  Chisinau, 
through  the  removal  of  the  legal,  institutional  and  financial  barriers.  It  shall  set  a  solid   
base      for  promotion  and  implementation  of  the  ESCO  business  model  and  energy 
performance contracting at a larger scale in Moldova (Nikolae 2014). 

As  of  2015,  there  are  not  active  ESCO  companies  on  the  market  in  Moldova.  There  are 
only candidate companies willing to adopt the ESCO model, in particular the EPC. These 
companies  are  small  or  medium  sized  private  companies  working  in  the  construction, 
utilities  and  engineering  sectors  that  are  looking  for  additional  business  opportunities 
(EC, 2016). 

There are some initiatives to present some projects as ESCOs. However, in reality these 
projects are not based on ESCO model. Currently, EPC is the targeted type of contract for 
implementation of energy services. 

12.2  Legal framework 

Generally,  the  energy  efficiency  legislation  in  Moldova  has  improved  significantly  since 
2013.  The  main  provisions  of  the  Directive  2006/32/EC  are  transposed  by  the  Energy 
Efficiency Law and the secondary legislation. The NEEAP for 2013 - 2015 was adopted in 
2013  setting  an  energy  savings  target  of  9%  by  2016.  The  second  EEAP  is  under 
preparation.  The  Law  on  energy  efficiency  performance  of  buildings  (No.  128)  was 
adopted  on  10.10.2014  and  the  Law  on  heat  and  cogeneration  promotion  (No.  92)  on 
29.05.2014. 

Specifically  for  energy  services,  the  standard  set  of  documents  for  energy  service 
procurement in public sector was developed in 2015. In addition, shared and guaranteed 
savings  Energy  Performance  Contract  models  were  established.  In  addition,  a  model  of 
an  Energy  Performance  Contract  for  street  lightning;  was  developed  to  facilitate  the 
implementation  of  energy  performance  contracts,  but  still  needs  to  be  adopted  (EC 
2015). 

12.3  Barriers to the development of the energy service market 

Existing  barriers  for  development  of  the  energy  service  market  in  Moldova  are  (EC, 
2016): 

—  Legal:  the  major  legal  problems  that  constrained  the  development  of  the  energy 
service market have been solved by the set of legal act adopted in 2014-2015. There 
is one issue remaining to be solved related to bookkeeping in the public sector. 

—  Financial:  The  cost  of  capital  in  local  financial  institutions  is  very  high,  reaching 
interests  of  above  22%  which  is  an  unbearable  burden  for  companies  to  engage  in 
EPCs. 

6  “ESCO  Moldova  -  Transforming  the  market  for  Urban  Energy  Efficiency  in  Moldova  by  introducing  Energy 
Service Companies”was developed in 2014 to  create a functioning, sustainable and effective ESCO market 
in Moldova by converting existing energy service provider companies into ESCO companies. It is financed 
by the Global Environmental Fund and implemented by UNDP 

http://www.md.undp.org/content/moldova/en/home/projects/esco-moldova.html  

43 

 
                                           
—  Lack  of  understanding  and  trust  from  the  local  banking  sector:  project  based 
financing is unknown and not practiced locally. Only equity financing is a viable option 
to get financing for business projects. 

—  Lack  of  energy  consumption  data  in  the  building  sector.  Only  aggregated  data  is 
available. The monitoring as a function is not present in the public and/or residential 
buildings. 

—  Lack of understanding for energy services and ESCOs. 

12.4  Recommendations to overcome the existing barriers 

—  Changes  should  be  applied  to  the  fiscal  legislation  in  order  to  accommodate  the 

energy performance contract peculiarities into the public bookkeeping system. 

—  Internal  and  external  financing  sources  should  be  gathered  specifically  with  the 

purpose of financing projects based on performance. 

—  An extensive capacity-building project shall be implemented in the banking and public 

sectors to stimulate the involvement of the private investments in public sector. 

—  As  a  consequence  of  capacity  building  activities,  the  public  authorities  will  better 
understand  the  benefits  of  investing  into  energy  efficiency  and  respectively  in 
metering the consumptions/savings. 

12.5  Energy services in the public and commercial sector 

The  total  investment  potential  of  energy  efficiency  measures  is  estimated  at  EURO  8,0  
billion. About EURO 3,1 billion of this are needed to achieve the national EE goal for 2020 
set by the NEEAP. 

The  estimated  investment  volume  for  the  improvement  of  EE  in  public  building  is  (EC, 
2016): 

—  EUR 0.4 billion for thermal rehabilitation of public buildings. 

—  EUR 0.25 billion for thermal rehabilitation of governmental buildings and 

—  EUR 0.3 billion for procurement of energy efficient equipment, by public sector. 

Since  the  public  sector  should  have  an  exemplary  role  in  the  promotion  of  EE, 
international  organizations  provide  support  to  the  central  and  local  government  in  the 
implementation of EE projects in public buildings. 

The  ESCO  Moldova  project  is  a  project  financed  by  the  Global  Environmental  Fund  and 
implemented by UNDP in the Municipality of Chisinau. Project partners are the Ministry of 
Environment,  Ministry  of  Economy,  Chisinau  City  Hall,  Energy  Efficiency  Fund,  Energy 
Efficiency Agency, Banking sector, Private sector. the total budget of the project is USD 
1.5 Million (Zaharia 2015). ESCO Moldova project is assisting the municipality of Chisinau 
in  tendering  out  some  public  buildings  for  energy  service  procurement.  It  was  expected 
that in the second half of 2015, the first 4 projects would have been initiated. Under the 
project conditions, each project will reach a maximum of USD 200.000 as budget, having 
an  average  discounted  payback  period  of  up  to  5  years.  The  target  public  buildings  are 
schools,  kindergartens,  hospitals  in  the  property  of  Chisinau  municipality.  The  Energy 
Efficiency  Fund  will  ensure  the  financing  of  the  projects,  which  will  provide  preferential 
loans  to  winning  companies.  At  the  same  time,  the  ESCO  Moldova  project  will  provide 
100% guarantees to loans (EC, 2016). 

In  addition,  ESCO  companies,  energy  managers,  financial  institutions  and  specialized 
institutions  are  trained  in  the  field  of  EPC  (Energy  Performance  Contracts)  in  the 
framework  of  the  project.  50  projects  on  energy  efficiency  were  pre-selected  and  have 
been  screened  for  relevance  to  be  implemented  using  the  EPC  financing  modality 
(Nikolae 2015). 

44 

 
12.6  Energy services in the residential sector 

The Moldovan residential sector is the largest energy consumer in Moldova. The building 
stock shows poor technical conditions in terms of EE and is continuously deteriorating. As 
a  consequence,  the  maintenance  cost  of  the  buildings  (including  energy  cost)  increased 
continuously. 

EE  renovation  of  existing  buildings  requires  a  high  volume  of  investments.  E.g.  the 
thermal rehabilitation of Chisinau residential building stock is estimated at approximately 
EURO  0,6  billion.  However,  because  of  the  lack  of  awareness  for  EE,  lack  of  capacity  to 
obtain financing for EE and lack of state and other incentives, the thermal rehabilitation 
cannot be realized in large part of the building stock. 

The  identified  barriers  for  the  implementation  of  EE  measures  in  multi  apartment 
residential buildings are (Rodina 2015): 

—  Lack  of  the  ownership  rights  of  residents  over  the  building  envelope  (common 

property); 

—  Lack  of  clear  rights  and  obligations  of  residents  for  the  management  ,  maintenance 

and improvement of the common property; 

—  Lack of effective management and maintenance of multi apartment buildings; 

—  Lack of proper legal status and structure of homeowners’ associations (HOAs); 

—  Inefficient and non-transparent decision-making procedures; 

—  Lack of mandatory building’s repairs and maintenance fund; 

—  Lack of enforcement mechanism. 

As a result of those barriers, the multi apartment buildings (MABs) are facing a low level 
of  confidence  of  the  financial  sector  in  the  market  and  lack  of  financing.  The  above 
mentioned  barriers  constrain  also  involvement  of  ESCOs  in  the  rehabilitation  of 
residential buildings. 

EBRD  is  supporting  the  Government  addressing  the  EE  issues  in  the  buildings  sector  by 
improving  the  legal  and  regulatory  framework  for  MABs.  The  EBRD  project  “Energy 
efficiency in buildings” is assisting the government in preparation of new legal framework 
for  residential  buildings.  As  of  2015  the  new  Condominium  Law  was  in  process  of 
adaptation. 

This  law  prescribes  legal  definition  of  joint  ownership  in  MAB  and  clear  rights  over 
building envelope (common property), including transfer of ownership of the building and 
related  assets  to  homeowners,  clear  and  transparent  rights  and  obligations  of 
homeowners,  creation  of  maintenance  fund  and  mandatory  contributions  to  repairs,  fair 
and  transparent  decision-making  procedures.  HOAs  is  a  recommended  form  of  building 
management  and  they  have  to  be  registered  as  legal  entities  with  clear  structures 
(Rodina 2015). 

Enforcement  of  the  new  Law  on  Condominium  will  help  solving  the  existing  problems 
related to the implementation of EE measures in residential buildings including based on 
EPC contracting of ESCOs. 

12.7  Energy services in the industrial sector 

In  2014-2015  the  development  of  legislation  and  financial  facilities  for  EE  in  buildings 
(public and residential) was the focus  of the government and therefore industrial  sector 
was not interesting for Energy services and ESCOs. 

12.8  Conclusions 

Moldova made a significant progress in the creation of better market conditions for faster 
development  of  energy  services.  New  legislation  for  Energy  Efficiency,  model  contracts 

45 

 
for  EPC  in  the  public  sector,  implementation  of  pilot  project  based  on  ESCO  principles, 
will  lead  to  establishment  of  a  sustainable  ESCO  market.  In  addition,  the  creation  of  a 
Loan  Guarantee  Fund  (regulation  already  drafted)  will  accelerate  accessibility  of  the 
private companies to the financial market. 

12.9  References 

Zaharia,  Nikolae.  2015.  “ESCO  Moldova  –  Transforming  the  market  for  Urban  Energy 
Efficiency  by  introducing  Energy  Service  Companies”  Presented  on  the  “High  Level 
Workshop  on  Effective  Energy  Efficiency  Policies,  New  Financing  Instruments,  and 
ESCOs”  organized  by  EC 
in  Varese  on  10-11.11.2015 
http://iet.jrc.ec.europa.eu/energyefficiency/node/9103 

JRC  and  held 

Rodina, Anastasia. 2015. "Policy and Legal Technical Assistance in the  Energy  Efficiency 
Sector  in  Georgia  and  Moldova”  Presentation  on  the  8th  Energy  Efficiency  Coordination 
Group Meeting in Podgorica, Montenegro on 02.06.2015. 

Contacted Experts - Survey respondents: 

Nikolae Zharia, project manager ESCO UNDP Project in Moldova 

46 

 
 
 
 
13 Development of the ESCO Market in Montenegro in 2015 

13.1  General overview of the market 

The  market  for  energy  services  showed  slow  progresses  in  the  last  years.  The  ESCO 
market  remains  at  a  very  preliminary  phase.  Planned  measures  for  the  future 
development  of  the  ESCO  business  exist,  and  they  are  particularly  focused  on  the 
applications  in  the  public  sector.  Some  activities  have  been  also  planned  and 
implemented  under  the  existing  “Regional  Energy  Efficiency  Program”  (REEP)  managed 
by EBRD (EC, 2016). 

There  are  not  active  ESCOs  in  the  market,  but  some  international  companies  (mainly 
equipment providers) show interest in street lighting projects. 

13.2  Legal framework 

The  adoption  of  the  new  Law  on  Efficient  Use  of  Energy  in  December  2014  further 
improved  setting  of  clearer  procedures  for  measurement  and  verification  of  energy 
savings  and  for  inspection  and  penalties,  the  establishment  of  a  new  register  of  large 
energy  consumers,  the  energy  performance  certification  procedures,  the  definition  of 
energy-related  products  and  the  obligations  for  market  players,  etc.  It  includes  also 
provisions from the Energy Efficiency Directive 2012/27/EU, namely on energy services, 
energy  management,  as  well  as  inventory,  plans  and  dynamics  of  renovation  of  central 
government buildings. (Energy Community 2016) 

The Law on Efficient Use of Energy sets the basis for preparation of Energy Performance 
Contract.  However,  lack  of  clarity  about  the  procurement  procedure  since  the  Law  on 
Public  Procurement  does  not  directly  recognize  ESCO  contracts.  EC,  2016The  Law  on 
Efficient Use of Energy (Article 49) introduces obligations for EPC: 

“Mutual rights and obligations of ESCO and users of energy services shall be regulated by 
the  Energy  Performance  Contract  under  which  implementation  of  energy  efficiency 
measures is paid according to the contractual level of energy efficiency improvement.” 

The  adoption  of  the  Law  on  Efficient  Use  of  Energy  enabled  a  more  efficient 
implementation  and  further  development  of  by-laws  in  the  field  of  energy  efficiency. 
ESCO  legislation  is  under  preparation  through  the  support  provided  by  Regional  Energy 
Efficiency Programme (http://www.wb-reep.org/eng) financed by EBRD (EC, 2016). 

The  Ministry  of  Economy  prepared  new  or  updated  packages  of  rulebooks  in  December 
2015,  following  provisions  of  the  Law  on  Efficient  Use  of  Energy  (OG  of  Montenegro 
57/2014). These include (Energy Community 2016): 

—  Rulebook on methodology for determining annual consumption of primary energy, the 
content of the energy efficiency improvement plan and the report on implementation 
of the plan of big consumers. 

—  Rulebook  on  the  content  of  the  energy  efficiency  improvement  program  and  plan  as 

well as report on the implementation of the plan of local self-governing unit. 

—  Rulebook  on  information  systems  of  energy  efficiency  and  on  the  manner  of 

submission of data. 

—  Rulebook on minimal energy efficiency requirements in buildings. 

—  Rulebook on certification of energy performance of buildings. 

—  Rulebook on performing energy audits of buildings. 

—  Rulebook on conditions for performing training, obtaining of authorization and manner 

of the managing of the registry for energy audits. 

—  Rulebook on regular energy audits of heating systems and air-conditioning systems. 

47 

 
—  Rulebook  on  methodology  for  determining  the  level  of  energy  efficiency  in  the 

procedure for public procurement. 

Montenegro  set  requirements  and  methodology  for:  procurement  of  energy-efficient 
buildings,  equipment  and  services,  in  the  Law  on  Efficient  Use  of  Energy  and  in  the 
Procurement Law (2nd NEEAP of Montenegro). 

13.3  Barriers to the development of the energy service market: 

The main barriers for the development of the market for  energy services in Montenegro 
are: 

—  Legal: The Law on Public Procurement does not cover ESCO contracts, since this kind 
of  relations  and  investments  cannot  be  treated  as  public  procurement.  As  a 
consequence,  a  solution  could  be  to  put  it  through  the  Law  on  Public  Private 
Partnership (EC, 2016). 

—  Financial:  Lack  of  dedicated  EE  Funds  which  can  stimulate  private  investment  in  EE 
projects  in  the  private  sector.  State  budget  and  budget  of  the  local  self-government 
(municipalities) are stated in the Law on Efficient Use of Energy as a main source for 
financing  of  EE  in  the  public  sector.  This  Law  does  not  stipulate  creation  of  an  EE 
fund.  Most  of  the  EE  projects  in  public  buildings  have  been  financed  through  grants 
received from IFIs (such as KfW, World Bank etc.) (EC, 2016). 

Other barriers that hamper the development of the ESCO market are (EC, 2016): 

—  Lack of interest of the public sector to invest in EE projects. 

—  Insolvency of municipalities. 

—  Political instability (changing of leading administrative structure in municipalities). 

—  Lack of experience with ESCO projects. 

—  Lack of experience on local level with preparation and tendering complex projects. 

—  Relatively small market size. 

—  Small project size and high transaction cost. 

—  Lack  of  energy  data  is  a  problem  at  all  level  in  Montenegro.  System  for  monitoring 
and management of energy consumption with exemption of few municipalities is not 
established  yet.  The  ministry  has  to  Re-establish  the  Central  Information  System 
collecting  and  processing  of  data  on  energy  consumption  from  all  public  institution. 
Municipalities  have  to  establish  their  information  systems,  to  prepare  planning 
documents,  and  to  report  to  the  Ministry  of  Economy.  But  this  circuit  is  not 
established  yet  and  data  are  not  collected  in  most  cases.  Without  good  data  it  is 
difficult  to  acquire  full  image  on  energy  consumption  and  to  estimate  potentials  for 
ESCO intervention. 

13.4  Recommendations to overcome the existing barriers 

Some steps and activities must be carried out to address the existing gaps (EC, 2016): 

●  Strictly future implementation of the legal framework on Energy Efficiency, EE 

Action Plan and Building Codes. 

● 

Incentives  and  financial  supports  for  investments  in  EE-  creation  of  EE 
Revolving fund. 

●  Preparation of EE programs and projects based on ESCO model for EE on local 

level. 

●  Awareness  raising  activities  and  promotion  of  ESCO  services  in  the  domestic 

market. 

48 

 
●  Capacity building for energy professionals and potential ESCOs. 

● 

Implementation  of  energy  audits  and  energy  management 
enterprises. 

in 

larger 

●  Preparation and implementation of EE pilot projects based on ESCO model. 

Montenegro  should  improve  statistical  data  collection  and  its  system  for  calculation  of 
energy  efficiency  indicators  and  savings,  as  well  as  the  monitoring  of  EEAP 
implementation.  The  methodology  and  platform  developed 
forward. 
Nevertheless,  Montenegro  still  needs  to  develop  the  system  for  its  implementation. 
Adequate human and financial resources should be dedicated to improve the situation in 
this area (Energy Community 2014). 

is  a  step 

13.5  Energy services in the public sector and commercial sector 

Relevant  studies  and  energy  audits  showed  that  there  is  a  significant  potential  for  EE 
improvement  in  many areas  in  public  and  commercial  sectors,  including  heating/cooling 
systems, inner lighting and public street lighting, water supply system (with great water 
losses)  etc.  In  the  sector  of  commercial  services,  hotels  and  commercial  buildings  are 
major energy consumers (Ministry of Economy 2013). 

As  mentioned  in  the  2nd  NEEAP,  the  implementation  of  EE  projects  in  the  public  sector 
during  the  period  2011-2013  did  not  result  from  a  systematic  approach  but  was  manly 
carried out and financed by international donors and IFIs. Montenegrin Energy Efficiency 
Project financed by World Bank and Project Energy Efficiency Program In Public Buildings 
(EEPPB)  financed  by  KfW  are  the  two  most  important  programs  focused  on  retrofit  of 
public buildings (schools, hospitals, kinder gardens). 

Although the potential investment in EE in public and commercial sectors through ESCO 
was mentioned in 2nd NEEAP, no ESCO projects in the public and commercial sector has 
been implemented following the energy performance principle yet (EC, 2016). 

The  barriers  that  hamper  investments  in  EE  and  development  of  the  ESCO  market  in 
Montenegro are: 

—  Limited  number  of  creditworthy  municipalities  and  limitation  on  borrowing.  Most  of 
the  municipalities  in  Montenegro  are  not  creditworthy,  or  have  limited  access  to 
credit.  Those  that  are  able  to  borrow  often  have  debt  levels  near  or  at  their  legal 
limitations for municipal borrowing (NALAS 2014). 

—  Lack  of  interest  to  invest  in  EE  (energy  services).  In  Montenegro,  the  municipalities 
can  rely  on  their  own  revenue  sources  for  more  than  80  percent  of  their  annual 
budgets, local investment priorities usually do not include EE. (NALAS 2014) 

—  A  One-Year  Budgeting  Process  and  Retention  of  Energy  Savings.  In  Montenegro, 
municipalities lack reserves or other means to carry over budget provisions from one 
year  to  the  next.  They  must  balance  their  annual  expenditures  with  revenues 
received  in  the  same  budget  year,  or  by  means  of  loans  taken  from  financing 
institutes  in  the  same  year.  Municipal  budget  rules  do  not  provide  any  internal 
accounting  mechanism  that  would  allow  a  direct  amortization  of  one  year’s 
investments using the next years’ additional revenues or energy savings. This applies 
also for EE investments in municipal public buildings (NALAS 2014). 

—  Complex  public  procurement  procedures.  The  Law  on  Public  Procurement  should 
ensure that the process for evaluating government tenders takes into account any EE 
related benefits that a particular proposal will deliver. 

—  Small project sizes, leading to high project development and transaction costs; 

Some  of  the  potential  solutions  to  overcome  the  above  mentioned  barriers  are  (NALAS 
2014): 

49 

 
—  Reclassifying  EE  investments  as  utility  services,  where  long-term  contracts  are 

implicitly allowed. 

—  Increased local revenue sources. 

—  Preparation and implementation of Municipal EE Action Plans (MEEAPs) or Sustainable 

Energy Action Plans (SEAP). 

—  Standardization  of  documentation  and  procedures  for  public  procurement  of  EE 

equipment and services. 

—  Develop and implement EE pilot project based on simplified and standardized EPC. 

—  Implement training and capacity building programs on national and local level. 

13.6  Energy services in the residential sector 

The  residential  sector  is  one  of  the  most  significant  energy  consumers  (especially  for 
electricity)  in  Montenegro.  The  households  dominate  in  in  final  energy  consumption  in 
whole period 1997-2011 with a rather constant share of 60-65%. before 1990 Buildings 
were  built  in  accordance  with  the  standards  of  former  SFRY  and  they  have  A  relatively 
low quality. Low price of electricity in the past in the residential sector, as well as benefits 
related  to  the  use  of  electric  appliances  for  space  heating,  lead  to  a  dominant  use  of 
electricity for space heating in residential buildings, especially in urban area. (Ministry of 
Economy 2013) 

Primary  and  secondary  legislation  supported  the  creation  of  Homeowner  associations 
HOA  and  maintenance  of  buildings.  Enforcement  should  address  HOA  formation, 
consistent payments, and clear and efficient way of securing payments when a household 
does not pay. 

The  residential  sector  is  also  facing  many  barriers  that  hamper  the  development  and 
investment in EE projects and the involvement of ESCOs. Some of them are (EC, 2016): 

—  Small project size and therefore relatively high transaction costs; 

—  Lack  of  affordable  EE  financing  schemes  for  lower  income  households  unable  to 

access the loan market; 

—  Perception of high risk by commercial banks; 

—  Relatively high commercial bank interest rates; 

—  Poor or lack of energy consumption data; 

Some of recommendations to overcome existing barriers in the residential sector will be: 

—  The  establishment  of  effective  Homeowner  Associations  that  have  legal  status  in 
order  to  open  bank  accounts  borrow  money  for  building  improvements;  enter  into 
contracts  with  service  providers.  This  will  contribute  to  faster  penetration  of  energy 
services  in  the  residential  sector  in  Montenegro.  Implement  Financing  and  Incentive 
Schemes for Family Houses will stimulate the investment in EE (World Bank 2014). 

—  Implement Financing and Incentive Schemes for Family Houses; 

—  Increase  information  outreach  and  organize  awareness  raising  campaign  to  promote 

EE, ESCO and benefit of energy services among homeowners; 

13.7  Energy services in the industrial sector 

Polices are not focusing on the industrial sector in due to long term financial problems of 
the  two  largest  energy  consumers7  (the  Aluminum  producer  –KAP  and  the  Niksic 

7 In the period from 1997 to 2011 the ferrous metallurgy and non-ferrous metals spent from 157.9 ktoe (2010) 
to  334  ktoe  (2007)  or  constituted  87-94%  of  total  final  energy  consumption  in  the  industry.  (Ministry  of 
economy 2013) 

50 

 
                                           
Steelworks).  From  2009  to  2011  the  energy  consumption  in  the  industrial  sector 
decreased  by  about  50%  (344.7  ktoe  in  the  2009.  172  ktoe  in  2010)  due  to  reduced 
production of aluminium and steel products (Ministry of Economy). 

In  other  smaller  industrial  enterprises  there  are  several  barriers  that  hamper 
implementation of energy services. Some of most common are (EC, 2016): 

—  Low  awareness  for  EE  and  energy  services  among  the  management  in  industrial 

enterprises. 

—  Lack of expertise and experts for EE and energy services in industrial enterprises. 

—  Low priority of investments in EE among Montenegrin industrial enterprises. 

—  No legal obligation for improvement of EE. 

13.8  Conclusions 

In the last four years Montenegro has been showing large progresses in transposing the 
EU  legal  framework  for  EE.  Further,  the  priority  should  be  the  adoption  of  the  missing 
secondary  legislation.  The  approval  and  implementation  of  Rulebooks  on  will  help 
stimulate  markets  for  energy  efficient  goods  and  services  in  Montenegro  (Energy 
Community 2016). 

In order to achieve the indicative energy savings target set by the 2nd NEEAP, significant 
financial  resources  should  be  mobilized,  in  addition  to  public  budget  financing.  It  is 
necessary to develop further financing models in the field of energy efficiency, including 
funding of energy services and ESCOs. 

Institutional structures in Montenegro should be further strengthened in order to  enable 
successful implementation of energy efficiency policies including ESCO model. 

13.9  References 

Energy  Community.  2014.  “Assessment  of  the  2nd  Energy  Efficiency  Action  Plans” 
https://www.energy-
community.org/portal/page/portal/ENC_HOME/DOCS/3500148/0926ED3AD1C5409CE05
3C92FA8C0E6A4.PDF 

Energy  Community.  2016.  Energy  Community  web  portal:  https://www.energy-
community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Implementation/Bosnia
_Herzegovina/Energy_Efficiency 

NALAS, 2014. “Scaling Up Energy Efficiency in Buildings in the Western Balkans Municipal 
Budgeting 
Bank 
http://www.worldbank.org/content/dam/Worldbank/Event/ECA/GN%20muni%20budget
%20final.pdf 

for  World 

–”Guidance 

prepared 

Finance 

Note 

and 

World  Bank,  2014.  Final  Report  ”Western  Balkans:  Scaling  Up  Energy  Efficiency  in 
Buildings” 
http://documents.worldbank.org/curated/en/2014/06/19782698/western-
balkans-scaling-up-energy-efficiency-buildings-final-report 

Ministry  of  Economy,  2013.  Energy  Efficiency  Action  Plan  of  Montenegro  2013  –  2015 
https://www.energy-
community.org/portal/page/portal/ENC_HOME/DOCS/1138177/0633975AB4E57B9CE053
C92FA8C06338.PDF 

Contacted Experts - Survey respondents: 

Zoran Kapor, GfA Consulting, Serbia 

Radovan Nikcevic, energy efficiency expert, Montenegro 

51 

 
 
14 Development of the ESCO Market in Serbia in 2015 

14.1  General overview of the market  

In  Serbia  ESCO  market  is  not  well  developed  yet.  Although  the  interest  of  the  private 
companies  in  providing  energy  services  is  increasing,  the  public  sector  is  slowly 
progressing  in  preparing  and  publishing  tenders  for  energy  services.  Furthermore,  low 
price of electricity and the lack of financial incentives remains a barrier. 

In  the  market  there  are  several  international  ESCO  companies  that  have  registered 
subsidiaries in Serbia, such as Eltec Petrol, GGE, Sun Energy Balkans, etc. and they have 
already started with implementation of EE projects based on ESCO concept. There is also 
a  significant  interest  from  a  number  of  companies  from  the  EU  countries  (Hungary, 
Romania, Italy, Austria, etc.) in developing ESCO projects. Few local companies such as 
ESCO - Energy Saving Company Belgrade, provide energy services to the private sector 
(industry and residential). Also, a high number of technology suppliers’ show interest in 
ESCO market, such as Philips, Siemens, Minel Schreder, GE, etc. 

14.2  Legal framework  

The Law on Efficient Use of Energy (OG 23/2013) , for the first time in Serbia, explicitly 
defines  the  energy  services  company  (“ESCO”)  and  sets  out  the  rules  for  energy 
performance  contracting  generally  in  line  with  the  EU  acquis,  aiming  at  providing  the 
overall legal framework for energy efficiency arrangements (CMS. 2015) . 

The  Rulebook  "Determining  Model  Contract  for  Energy  Services  for  Implementation  of 
Energy Efficiency Improvement Measures for Public Sector Users" was adopted on the 8th  
of May 2015 as secondary legislation under the Law on Efficient Use of Energy promoting 
investments in energy efficiency investments. This secondary legislation consists of ESCO 
contract  templates  for  energy  efficiency  ESCO  investments  in  public  buildings  and  in 
public street lighting. (REEP. 2015) 

To  enable  implementation  of  these  principal  possibilities  introduced  by  the  EE  Law,  the 
Rulebook on Model Energy Service Contracts for the Implementation of Energy Efficiency 
when  Users  are  from  Public  Sector  (published  in  the  Official  Gazette  RS  No  41)    was 
finally adopted in May 2015. It followed the one-year work of the national working group 
within  the  Ministry  of  Mining  and  Energy  (with  the  support  of  the  European  Bank  for 
Reconstruction  and  Development  in  the  framework  of  REEP8,  involving  GFA  Consulting 
Group and CMS as their external consultants). This secondary legislation (“ESCO By-Law” 
) consists of two energy services contract models for energy efficiency investments, one 
for  public  buildings  and    one  for  public  lighting.  Moreover,  it  generally  allows  the 
establishment  of  public  private  partnerships  between  the  relevant  public  partners  (a 
municipality,  a  public  company,  a  State)  and  the  relevant  private  partners  (i.e.  ESCO 
company)  on a long-term basis wherein the installation and management of the energy 
efficiency  measures  by  a  private  partner  are  to  be  financed  from  the  savings  achieved, 
thereby not involving public debt (CMS 2015). 

Importantly, the receivables attributable to a private partner from the savings are to be 
further  transferred  to  third  parties,  which  will  hopefully  boost  the  overall  bankability  of 
ESCO projects in Serbia. (CMS. 2015) 

The two model agreements set out by the ESCO By-Law envisage three main periods of 
the ESCO agreement (CMS. 2015): 

1.  Preparatory  Period,  mainly  consisting  of  planning  and  design  activities  pertaining 

to the relevant project; 

8  REEP  is  an  abbreviation  for the  Regional  Energy  Efficiency  Programme for  the  Western  Balkans.  The  overall 
aim of the REEP policy dialogue is to support legislators and investors eliminate market barriers to energy 
efficiency and accelerate the take-up of energy services. 

52 

 
                                           
2.  Implementation  Period,  in  which  activities  related  to  the  implementation  of  the 
respective  energy  savings  measures  by  a  private  partner  in  cooperation  with  a 
public partner are to be undertaken; 

3.  Guarantee  Period,  in  which  utilizing  the  energy  savings  potentials  of  the 
contracted facility, in the course of which energy savings and financial savings are 
achieved as a result of the implemented measures. 

The  ESCO  By-Law  further  contains  sophisticated  provisions  relating  to  collateral 
packages, warranties regarding the performance, the insurance of the project, the force 
majeure  clauses  and  detailed  rules  regarding  the  aforesaid  three  main  contractual 
periods. (CMS. 2015) 

The 2nd Energy Efficiency Action Plan for the period 2013-2015 was adopted in October 
2013.  In  this  document  promotion  of  ESCOs  was  mentioned  as  a  one  of  the  four  cross 
sector  measures.  In  the  “Assessment  of  the  Second  Energy  Efficiency  Action  Plans  of 
Contracting  Parties”  prepared  by  the  Energy  Community  is  stated  “In  order  to  achieve 
the  indicative  energy  savings  target,  significant  financial  resources  should  be  mobilized, 
in addition to public budget financing. It is necessary to further develop models for public 
private partnership in the field of energy efficiency (including ESCO).” 

14.3  Barriers to the development of the energy service market: 

The barriers for development of the market for energy services and ESCOs in Serbia are: 

—  Lack  of  experience  in  the  public  sector  for  the  development  of  ESCO(s)  and  PPP 

projects. 

—  Lack of experience in the preparation and tendering of complex projects at local level. 

—  Discrepancies  in  the  provisions  of  primary  legislation.  Complex  PPP  project 

preparation and approval procedure. 

—  Low price of electricity. 

—  Lack of incentives. 

—  High-level of indebtedness of municipalities. 

—  Misleading price-structures caused long-lasting structural deficiencies through under-

investment in efficient. 

—  Low awareness about EE projects and low priority of such projects. 

—  Lack of reliable energy data. 

—  Lack of trust between public and private partners. 

14.4  Recommendations to overcome the existing barriers 

Some of the recommendations to overcome the existing barriers to the functioning of an 
ESCO  market  in  Serbia  are:  the  capacity  building  of  the  public  administration  through 
organization of workshops and events, development of a program website, development 
of  successful  pilot  projects  for  broader  dissemination,  market  studies,  advertising,  and 
educational programs for schools and other organizations to address the information and 
knowledge gaps related to EE, build demand for financing, and improve the sustainability 
of  energy  savings.  In  addition  to  these,  other  two  options  can  also  support  the 
developing of the ESCO market in Serbia such as: developing procedures that help public 
agencies  engage  ESCOs  under  performance-based  contract 
for  preparation  of 
performance-based  tender  documents  for  public  procurement  of  energy  services;  and 
refining  these  bidding  documents  based  on  the  implementation  experience  to  provide 
standard  documents  for  future  use.  Moreover,  carrying  out  capacity  building  for  energy 
service  providers  (ESCOs)  and  other  market  actors  is  crucial  to  enhance  their  ability  to 

53 

 
conduct energy audits and to screen, design, evaluate, appraise, finance, implement, and 
measure EE investments, with special focus on the public sector. 

Capacity  building  activities  in  Serbia  have  been  implemented  by  the  EBRD  REEP 
Programme and “EnPC-INTRANS Capacity Building on Energy Performance Contracting in 
European Markets" in a project financed by the EU in the framework of Horizon 2020. 

In addition to these, identification, assessment, and recommendation of changes shall be 
carried  out,  if  needed,  in  rules  for  public  accounting,  budgeting,  and  procurement  to 
facilitate the financing of EE projects and procurement of EE services. These may include 
policy  development  related  to  existing  public  procurement  and  budgeting  rules  for  EE 
services and development of alternate financing models for EE in the public sector. 

14.5  Energy services in the public sector 

The  Energy  Efficiency  Budget  Fund  (9)  was  established  in  2014  following  the  Law  on 
Efficient Use of Energy.  The Government adopted the Programme for financing activities 
and  measures  for  EE  for  2014  with  a  volume  of  around  EUR  2.5  Million  and  the 
Programme  for  financing  activities  and  measures  for  EE  for  2015  with  a  volume  of  EUR 
1.5  Million  for  financing  of  energy  efficiency  projects  in  Serbia  through  the  Energy 
Efficiency  Budget  Fund.  The  promotion  of  the  market  for  energy  services  can  be  also 
financed through the Energy Efficiency Budget Fund, managed by the Ministry of Mining 
and  Energy.  In  2014  and  2015  several  selected  municipalities  received  funds  from  the 
Energy  Efficiency  Budget  Fund  for  the  establishment  of  EE  projects  (Ministry  of  Mining 
and Energy 2016). 

In  2015,  the  Ministry  of  Finance  issued  a  note  on  “Public  Debt”  issue  stating  that 
repayments on the basis of guaranteed savings were not to be considered as public debt. 
Thus, the implementation of future ESCO projects is not subject to restrictions stipulated 
in the law with regard to borrowing by local government units (Brenke 2015). 

Barriers for implementing EE and energy services in municipalities in Serbia are: 

—  Lack of interest for investment in EE. In Serbia, where municipalities can rely on their 
own  revenue  sources  for  more  than  80  percent  of  their  annual  budgets,  local 
investment priorities usually do not include EE (NALAS 2014). 

—  Retention of Energy Savings. In Serbia, municipalities lack reserves or other means to 
carry  over  budget  provisions  from  one  year  to  the  next.  They  must  balance  their 
annual expenditures with revenues received in the same budget year, or by means of 
loans taken from financing institutes in the same year. Municipal budget rules do not 
provide  any  internal  accounting  mechanisms  that  would  allow  for  the  direct 
amortization  of  one  year’s  investments  using  the  next  years’  additional  revenues  or 
energy  savings.  This  is  also  applied  to  EE  investments  in  municipal  public  buildings 
(NALAS 2014). 

Several  tenders  for  street  lighting  projects  are  under  preparation  with  support  to 
municipalities  provided  within  the  EBRD  Regional  Energy  Efficiency  Programme.  Also, 
within the programme “Development of a Sustainable Bioenergy Market in Serbia” (DKTI) 
GIZ is supporting municipalities in developing energy supply contracting (EC, 2016). 

After  the  completion  of  the  public  tender,  the  city  of  Vrbovec  and  the  selected  bidder 
signed the first EnPC contract on 16/06/2015. The Energy Performance Contract (EnPC) 
model  was  developed  as  a  part  of  the  Regional  Energy  Efficiency  Programme  (REEP), 
funded by the European Union and implemented by EBRD (REEP 2015). 

The  construction  phase  of  the  street  lighting  project  has  started  and  the  period  of 
guaranteed  energy  savings  will  commence  afterwards  and  the  whole  city  and  its 
surroundings  will  be  illuminated  with  a  new,  efficient  and  comfortable  lighting.  It  is 

9 The Energy Efficiency Budget Fund is not a separate institution, as was previously foreseen, but it is a budget 

fund managed by the Ministry of Mining and Energy. 

54 

 
                                           
expected that after the implementation, the project will result with energy cost savings of 
EUR 165,702 per year and energy savings per year of 1,193,686 kWh (REEP 2015). 

14.6  Energy services in the residential sector 

Primary and secondary legislations are in place, but enforcement is lacking. Enforcement 
should address HOA formation and payment arrangements. District heating consumption 
billing  is  still  missing  in  most  of  the  multi  apartment  buildings  (MAB)  (Ballard-Tremeer, 
2015).  In  existing  MAB  according  to  the  Law  on  Efficient  Use  of  Energy  the  owners  of 
apartments shall finance installation of heat meters on apartment level. Most of residents 
cannot  finance  installation  of  heat  meters  in  their  apartments.  Therefore,  the  residents 
can not benefit from energy savings, although the legislation is in place. 

Policies to address the problem of non-payment of utilities/ building maintenance charges 
need  further  enacting  and  implementation.  Improvements  are  needed  in  the  process  of 
obtaining  payments  from  owners  who  have  not  paid  their  obligations  on  time.  Another 
related  problem  is  the  lack  of  incentives  for  financing  of  EE  in  residential  buildings  (EC, 
2016). 

However, there is one ESCO company (subsidiary company of Dutch ESCO) that started 
to  implement  EE  projects  in  residential  buildings  based  on  energy  supply  contracting. 
They  develop  small  scale  projects  for  heating  and  cooling  of  residential  buildings  in 
Belgrade. In Tetovska Street in Belgrade the ESCO provide heating and cooling services 
to  16  apartments  and  in  Zemun  for  48  apartments.  This  building  is  equipped  with 
combination  of  floor  heating  and  fan  coli  units  for  heating  and  cooling.  High  level  of 
individualization  of  apartments,  with  sophisticated  control  systems  is  still  new  on  the 
residential  market  in  Serbia.  Geothermal  energy  is  using  to  meet  the  energy  needs  for 
heating  and  cooling  of  the  residents  in  both  buildings.  It  covers  about  80%  of  the  total 
heating and cooling needs. The residents pay the price they would normally pay only for 
heating in the city (Sunenergybalkan 2016). 

14.7  Energy services in the industrial sector 

The market for energy services in the Serbian industrial sector is not developed yet. The 
EE  is  not  in  agenda  of the  management  of  industrial  enterprises  since  the  benefit  of  EE 
cannot  be  recognized,  although  most  of  the  companies  are  facing  high  energy 
consumptions, and obsolete technologies.  

The  Government  is  aware  of  high  energy  intensity  of  Serbian  industry  and  is  trying  to 
push investments in EE through the development of EE policies and legislation. Pursuant 
to  the  Law  on  Efficient  Use  of  energy  all  industrial  enterprises  are  obliged  to  introduce 
energy management system (energy manager) and to prepare action plans for EE if they 
consume more energy than prescribed by the government. In addition, they are subject 
to energy audits, performed by certified entities (Ministry of Mining and Energy 2013). 

14.8  Conclusions 

Serbia  made  a  significant  step  towards  the  full  transposition  of  the  energy  efficiency 
acquis with the adoption of secondary legislation on energy management, monitoring and 
reporting  on  the  EEAP,  labelling  of  energy-related  products  and  ESCOs.  However,  more 
needs to be done in the near future for a full implementation. The institutional capacity of 
public institutions responsible for energy efficiency should be strengthened in the area of 
policy-making,  at  the  implementation  level,  as  well  as  in  all  the  institutions  involved  in 
the implementation of the EEAP and energy efficiency legislation. 

The  remaining  challenges  regarding  the  overall  operability  of  the  EE  Law  include:  the 
need to introduce particular sector-specific incentives for energy efficiency in the relevant 
legislation  (notably,  the  real  estate  legislation and  the  tax-related  one)  and  the  gradual 
raising  of  financiers’  perceptions  of  the  actual  feasibility  of  the  ESCO  projects.  While 
some of the banks and other market players in the Serbian financial sector have recently 

55 

 
become  acquainted  with  the  overall  concept,  the  remaining  challenge  is  that  the  said 
players  often  assess  the  creditworthiness  of  the  client instead  of  the  project  itself  (CMS 
2015). 

Yet, similarly to other countries where such concepts were introduced for the first time, it 
may  still  be  expected  that,  gradually  −  and  with  very  first  projects  becoming 
(successfully)  implemented  −  financiers  may  become  more  and  more  receptive  for 
engaging in the financing of these projects. 

14.9  References 

CMS,  2015.  “ESCO  a  new  opportunity 
http://www.cms-rrh.com/Hubbard.FileSystem/files/Publication/e6d5b25f-e6f0-464d-
b764-707057932f71/Presentation/PublicationAttachment/b5394b07-0070-4fd3-abf0-
70db0f255551/CMS_ESCO_brochure.pdf 

for  Serbian  ESCO  Market”  Publication 

Brenke.  Sigfied,  2015.  “Progress  in  ESCO  Development  and  barriers  to  be  removed” 
presentation on the 7th Session of the EECG in Vienna, 18.03.2015 https://www.energy-
community.org/portal/page/portal/ENC_HOME/DOCS/3652167/12332DEFA0786033E053
C92FA8C0F94B.PDF 

Ballard-Tremeer,  Grant.  2015.  “Market  Demand  Study  on  Residential  Building  EE  in 
Western  Balkans”  presentation  on  the  7th  Session  of  the  EECG  in  Vienna,  18.03.2015 
https://www.energy-
community.org/portal/page/portal/ENC_HOME/DOCS/3648178/1207BB756B5301F5E053
C92FA8C0FF0C.PDF 

REEP.  2016.  Regional  Energy  Efficiency  Programme  (REEP)  for  the  Western  Balkans 
http://www.wb-reep.org/eng/news=27 

Sunenergybalkan. 
http://www.sunenergybalkan.com/projects/balkanprojects 

Company  web 

2016. 

page 

visited 

on 

22.02.2016: 

Ministry of Mining and Energy, 2013 Law on Efficient Use of energy (OG 25/2013) 

Contacted Experts - Survey respondents: 

Zoran Kapor, GfA Consulting, Serbia 

Radovan Nikcevic, energy efficiency expert, Montenegro 

56 

 
 
 
 
 
15 Development of the ESCO Market in the former Yugoslav 

Republic of Macedonia in 2015 

15.1  General overview of the market 

The  energy  service  market  in  the  former  Yugoslav  Republic  of  Macedonia  is  at  a  very 
preliminary stage. Currently, there have been no significant changes in the development 
of the ESCO market in last years (2014 – 2015) (EC, 2016). 

There are no companies in the former Yugoslav Republic of Macedonia, which can provide 
full range of ESCO services. Few small private companies (e.g. distributors of equipment) 
provide  different  kind  of  services  as  energy  audit,  installation  and  maintenance  of 
equipment  for  heating  and  cooling,  replacement  of  heating  systems  in  municipalities' 
buildings or develop and realize PPP in street lightning. 

15.2  Legal framework 

Energy  services  and  ESCOs  are  mentioned  in  the  Laws  on  Energy  adopted  in  2011,  but 
the  secondary  legislation  for  energy  services  has  not  been  prepared  and  adopted  yet. 
According  to  this  Law,  an  Energy  Efficiency  Fund  shall  be  created  for  financing  of  EE 
projects in the public sector. 

The  government  adopted  the  “Strategy  for  promotion  of  EE  until  2010”  in  2010.  The 
promotion of  ESCO (energy services) was mentioned as one of the priority. Pursuant to 
the Strategy the Government should prepare and adopt National Energy Efficiency Action 
Plans  (NEEAPs)  to  achieve  the  indicative  energy  saving  target  of  20%  until  2020.  The 
second National Energy Efficiency Action Plan (NEEAP) due in 2015 was prepared in 2014 
but has not yet been adopted, because of the issues connected with the creation of the 
EE  Fund.  The  second  NEEAP  takes  into  consideration  ESCOs  as  a  possible  source  for 
financing  of  EE  measures  in  buildings  (retrofit  of  residential,  public  and  commercial 
buildings),  improvement  of  public  street  lighting  and  industrial  processes  including 
introducing energy management and energy audits. 

15.3  Barriers to the development of the energy service market 

The  main  barriers  for  the  development  of  the  market  for  energy  services  in  the  former 
Yugoslav Republic of Macedonia are: 

—  Legal:  Need  for  a  secondary  legislative  framework  and  predefined  EPC.  The  process 
for the adoption of the complete legislation for ESCOs has to be finished. Apart from 
that,  some  changes  and  addition  are  needed  in  existing  legislation,  especially 
regarding the public procurement. 

—  Financial:  There  are  no  convenient  sources  to  finance  the  activities  of  energy 
services.  It  means  special  credit  lines  for  these  financing  energy  services  are  not  in 
place.  In  addition  there  are  not  state  incentives  for  EE.  Despite  the  Law  on  Energy 
prescriptions,  the  EE  Fund  has  not  been  created  yet.  Finally,  the  absence  of  Funds 
and programs for financing EE in municipalities are not framed. 

Other barriers that may hinder the further development of ESCO market are: 

—  Lack  of  understanding  of  ESCO  business  and  lack  of  information  of  energy  services 

and EPC in the public, residential and commercial sectors. 

—  Lack of capacity for development of EE projects. 

—  Lack of know-how of companies that would like to work as ESCOs. 

—  Small market and the low values of regular projects. 

—  Lack of trust among the potential clients and ESCOs. 

—  Lack of reliable energy data for establishment of base-line energy consumption. 

57 

 
—  Lack  of  monitoring  of  energy  consumption  in  public  buildings  (only  in  few 

municipalities); 

—  the low price of electricity. 

—   no  possibility  for  apartment  owners  in  multi  apartment  buildings  to  control  and 
manage  their  consumption  (absence  of  metering  devices  and  regulation  on  the 
apartment level). 

15.4  Recommendations to overcome the existing barriers 

Most  barriers  have  to  be  removed  by  authority  (legislation,  establishment  of  clear  road 
map for the development of ESCOs). Law for EE is not sufficient for the implementation 
of  EE  through  ESCOs  and  therefore  secondary  legislation  and  procedures  for  public 
procurement  of  energy  services  has  to  be  developed  and  adopted.  Standardized  EPC 
agreement has to be developed. 

Capacity  building  programs  and  events  such  as  workshops  for  national  and  local  public 
authorities  have  to  be  developed  and  organized.  At  the  same  time  capacity  building 
programs for potential ESCOs should be implemented. 

15.5  Energy services in the public sector 

The government approved the National Program for Energy Efficiency in Public Buildings 
(NPEEPB) in 2013 with proposed EE Fund as the main financing mechanism. The NPEEPB 
(Phase 1) seeks to renovate up to 2,441 governmental and municipal buildings over 7-15 
years. 

The reconstruction of public buildings shall be funded though the EE fund10 using energy 
supply  agreements.  However,  it  is  still not  clear  how  the  funding  will  be  structured  and 
the institutional set up of the EE fund. There are two possible options for management of 
the fund: (Singh 2015) 

Option  1  –  create  a  new  state  entity/corporation  to  act  as  EE  Fund  with  competitively 
recruited fund manager; 

Option 2 – EE Fund would be managed by Macedonian Bank for Development Promotion 
(MBDP) with recruited specialists; 

There is still absence of Energy Efficiency projects implemented on the basis of the EPC   
model in the former Yugoslav Republic of Macedonia. 

Some  of  the  barriers  that  hamper  the  implementation  of  EPC  in  the  public  sector 
(buildings and street lighting) are (World Bank 2014, EC, 2016): 

—  Limited number of creditworthy municipalities and borrowing capacity. 

—  Limitation on municipalities borrowing. 30% is the maximum ratio of debt service to 

budget revenues. 

—  Multi years budgeting is allowed according the legal framework. However, in practice 
this  process  is  difficult  thereby  discouraging  municipalities  to  conclude  multi-year 
contracts. 

—  Line-Item Budgeting. The use of standard line-item budgeting means that the amount 
set  aside  in  a  municipality’s  budget  to  pay  energy  bills  (measured,  for  example,  in 
cost per litre, cubic meter, ton, or kWh of purchased energy) usually cannot be used 
for other purposes—in particular if it is taken from state subsidies. This creates a high 
uncertainty  among  local  decision  makers  as  to  whether  and  how  they  can  use  this 

10 This fund should be and Revolving EE Fund with an initial capitalization of €30 million in 2016, with second 
capitalization of additional €30 million in 5-7 years  

58 

 
                                           
 
money  to  procure  EE  services  instead  of  purchase  energy.  This  is  independent  from 
the question of whether energy supply is organized by the municipality itself, or one 
of its public utilities, or any other third party. (NALAS 2014) 

—  Lack of Separate Accounts for Capital and Operating Expenditures. There may not be 
foreseen the transfer of a surplus from their operating budget to their capital budget, 
and  vice-versa  in  the  budget  plan.  If  EE  investments  generate  savings  on  a 
municipality’s  energy  bill,  the  saved  operating  funds  may  remain  unused  if  they 
cannot  be  transferred  to  the  capital  budget  (which  would  require  prior  national 
government approval). Furthermore, the saved amount is usually deducted from the 
operating budget approved by the national government in future years, since budgets 
are often based on the prior year’s actual expenditures.(NALAS 2014) 

—  Lack  of  budget  autonomy.  The  municipalities  have  limited  budget  autonomy  and 
depend on the transfer of state funds for both capital and operating costs. Therefore 
the  state  has  very  high  control  of  the  local  budgets  and  the  central  government 
(Ministry of finance) must regularly approve the investment budget. It means that if 
investments  in  EE  (e.g.  for  retrofit  of  buildings)  are  not  a  priority  of  the  central 
government, local investment proposals can be rejected by the Ministry of Finance.  

—  Incomplete  public  procurement  legislation.  The  provision  of  the  Law  on  Public 
procurement made it impractical for the ESCO model to be implemented. The Law on 
Public-Private-Partnership  should  apply  to  contract  between  public  entities  and 
ESCOs. 

—  Complex public procurement procedures. 

—  Lack  of  model  EPC  and  standardized  procedures  for  public  tendering  of  energy 

services. 

—  Small project sizes, leading to high project development and transaction costs. 

Some suggestions to address these barriers are: 

Model EPC contracts for implementation of energy services in municipality buildings and 
public  lighting,  has  to  be  prepared  and  adopted.  A  legal  framework  that  allows 
municipalities to establish long-term contracts has to be prepared. Energy saving criteria 
has to be introduced in the public procurement. Standardize agreements and procedures 
shall be developed and similar projects across municipalities and public entities should be 
aggregated. 

The  development,  implementation,  monitoring,  and  regular  updating  of  local  EE  action 
plans and SEAPs has to be ensured by the local authorities. Earmarking of funds provided 
through  national  EE  funds  for  municipalities  and  establishment  of  specific  national 
support  programs  for  EE  in  municipalities  can  stimulate  the  energy  service  market.  In 
addition,  the  establishment  of  national  support  programs 
for  the  setup  and 
implementation of ESCO models in municipal public buildings and services may reach the 
same result (Limaye et al. 2014). 

The  European  Union  and  the  International  Financial  Institution  have  supported  the 
implementation  of  projects  to  promote  energy  services  and  EPC  in  the  former  Yugoslav 
Republic of Macedonia since 2014.  

The  City  of  Skopje  and  the  Macedonian  Centre  for  Energy  Efficiency  (MACEF)  has 
participated as project partners to the “Streetlight EPC Project”  since 2014. This project 
is  co-financed  by  Intelligent  Energy  Europe  Programme  of  the  European  Union.  The 
project  promotes  energy  services  and  EPC  in  the  sector  of  public  street  lighting  in 
municipalities. A short guideline for EPC was developed as one of the project goals. 

In  the  framework  of  the  World  Bank  project  a  three-year  energy  efficiency  program  for 
municipalities,  methodology  and  templates  for  Energy  Efficiency  Programmers  were 
prepared.  In  addition,  a  template  for  municipal  action  plans  (MAP)  was  developed.  Pilot 
projects  for  two  Municipalities  (Municipality  of  Staro  Nagorichane  and  Municipality  of 

59 

 
Radovish)  have  been  prepared  together  with  EEP  and  MAP.  An  excel  tool  was  prepared 
for  data  collecting.  The  Energy  Agency  in  Republic  of  Macedonia  is  a  beneficiary  in  this 
project (EC 2016). 

Pre-Feasibility Studies for three sectors were developed: 

1.   Municipal Buildings 

2.   Street Lighting 

3.   Water pump stations 

According the experts after the implementation of the above mentioned projects, certain 
precondition  will  be  crated  which  will  enable  introduction  of  an  EE  Found  and  the 
development  of  EPC  projects  in  Macedonian  municipalities.  However,  existing legislation 
barriers have to be solved in the meantime. 

15.6  Energy services in the residential sector 

The  residential  sector  in  the  former  Yugoslav  Republic  of  Macedonia  has  high  energy 
saving potential, since the large part  of the  existing building stock is obsolete and need 
renovation. 

Primary and secondary legislation for housing is in place, but enforcement is lacking. The 
Law  on  housing  stipulates  that  every  multi  apartment  facility  must  operate  as  a  legal 
entity  –  to  form  a  community  of  tenants  of  the  building  or  delegate  the  housing 
maintenance  function  to  a  professional  organization,  is  a  big  step  forward  in  the 
legislation, which should enable faster renovation of these buildings. 60% of multi-owner 
residential buildings do not have created a Homeowner association or conclude a contract 
with professional company for maintenance of the buildings. 

This  sector  also  faces  a  number  of  barriers  hampering  these  Energy  Efficiency   
investments. The key barriers are: (World Bank. 2014) 

—  small project size and therefore relatively high transaction costs. 

—  low energy tariffs (especially for electricity). 

—  perception of high risk by commercial banks. 

—  HOAs’ decision-making processes is complicated and they have low creditworthiness.  

—  lack  of  heat  metering  devices  installed  in  multi  apartment  buildings  (norm-based 
billing systems for heating)- the owners are not motivated to invest in energy saving.  

—  relatively high commercial bank interest rates. 

Enforcement  of  the  Law  on  Housing  and  establishment  of  Home-Owners  association 
(HOAs) will ensure higher quality of contracts with all service providers, in that direction 
the ESCO services, too. 

15.7  Energy services in the industrial sector 

Lack of understanding of EE and among the management of industrial enterprises is the 
main  barrier  for  development  of  energy  services  and  ESCO  business  in  industry. 
Nevertheless  in  the  past  two-three  years  few  EE  projects  were  implemented  in  few 
industrial enterprises. 

There  are  few  initiatives  focused  on  the  promotion  of  investment  in  EE  in  industry.  The 
USAID  project  “Energy  Management  in  Industry”  has  promoted  introduction  of  energy 
management  in  industry  including  development  of  guidelines  for  energy  management 
and EE best practices. The Second initiative, funded by Global Environment Fund (GEF), 
UNIDO and Macedonian stakeholders is the project “Catalyzing market transformation for 
industrial energy efficiency and accelerate investments in the best available practices and 
technologies  in  Macedonia”.  The  project  will  accelerate  the  transformation  of  the 

60 

 
Macedonian  market  for  industrial  energy  efficiency  by  strengthening  policy,  regulatory 
and institutional frameworks for IEE and support increased diffusion of and investment in 
the  best  available  industrial  energy  efficiency  practices  and  technologies.  Introducing 
energy management and energy audit in industry, training for EE of mangers of industrial 
enterprises are key components of this project (EC, 2016). 

15.8  Conclusions 

The  first  priority  for  the  former  Yugoslav  Republic  of  Macedonia  in  the  next  period 
remains  to  adopt  the  second  EEAP  and  to  implement  its  measures.  The  Ministry  of 
Economy should take the initiative to promptly unblock the Government’s approval of the 
second  EEAP,  as  a  key  policy  document  enabling  investments  in  energy  efficiency. 
Strengthening  the  institutional  capacity  in  both  the  Ministry  of  Economy  (the  Energy 
Efficiency department) and in the Energy Agency is extremely important, as the existing 
human  resources  proved  to  be  insufficient  during  the  realization  of  the  first  EEAP.  The 
establishment  of  the  Energy  Efficiency  Fund  is  expected  to  strongly  support  the 
implementation of energy efficiency measures (Energy Community 2016). 

15.9  References 

Energy  Community,  2016.  Energy  Community  web  portal:  https://www.energy-
community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Implementation/Bosnia
_Herzegovina/Energy_Efficiency 

NALAS, 2014. “Scaling Up Energy Efficiency in Buildings in the Western Balkans Municipal 
Budgeting 
Bank 
http://www.worldbank.org/content/dam/Worldbank/Event/ECA/GN%20muni%20budget
%20final.pdf 

for  World 

Guidance 

prepared 

Finance” 

Note 

and 

Singh,  Jas,  2015.  “Financing  Energy  Efficiency  in  the  public  Sector  Using  EE  Funds” 
Presentation  on 
in  Vienna,  Austria  on  18.03.2015 
https://www.energy-
community.org/portal/page/portal/ENC_HOME/DOCS/3648202/120A696586B87D14E053
C92FA8C0BCF9.PDF 

the  WBIF-ECS  Workshop 

World  Bank,  2014.  Final  Report  ”Western  Balkans:  Scaling  Up  Energy  Efficiency  in 
Buildings” 
http://documents.worldbank.org/curated/en/2014/06/19782698/western-
balkans-scaling-up-energy-efficiency-buildings-final-report 

Limaye,  Dilip,  Jas  Singh,  Kathrin  Hofer.  2014.  “Establishing  and  Operationalizing  an 
Energy Efficiency Revolving Fund - Guidance Note” 

http://www.worldbank.org/content/dam/Worldbank/Event/ECA/revolving.pdf 

Contacted Experts - Survey respondents: 

Konstantin Dimitrov, Macedonian Centre for Energy Efficiency, Skopje 

Zdravko Stefkovski, ESCO Company, Skopje 

61 

 
 
 
 
16 Development of the ESCO Market in Turkey in 2015 

16.1  General overview of the market 

The  ESCO market in Turkey is still considered  as moderate, although it has a very high 
potential. 

As of January 2016 there were 36 ESCOs (EDV)11 authorized  by the General Directorate 
for  Renewable  Energy  (DGER)  to  operate  in  the  Turkish  market.  6  of  them  are  large 
companies,  the  rest  are  small-medium  sized  private  companies.  They  provide  different 
kinds of energy services, including (Akuner 2015): 

—  Training and certification of energy managers, 

—  Carry out of energy efficiency audit and consulting studies using service agreements, 

—  Preparing a project including required measures to improve energy efficiency, 

—  Implementation  of  agreements  with  guaranteed  energy  saving  determined  after  the 

energy audit and implementation of identified energy efficiency measures. 

Turkish  ESCOs  carry  out  all  type  of  projects  including  passive  and  active  energy 
consuming systems in buildings and industry, including: 

●  Renovation  or  replacement  of  EE  consuming  passive  (building  envelope  – 

insulation) and active (heating-ventilation-cooling) 

● 

lighting, steam, compressed air, systems 

●  Automation of energy consuming system 

●  Recovery of waste heat 

●  Application of cogeneration/tri-generation systems 

●  Application of solar and wind energy, heat pumps 

●  Energy certification of buildings and green building studies can be regarded as 

secondary areas for ESCOs. 

The  commercial/service  sector  buildings  and industries  are  preferred  areas  for  the  work 
of ESCOs. 

Most  ESCOs  conclude  regular  service  contracts  or  sales  contracts  (in  the  case  where 
ESCO  is  a  provider  of  energy  efficient  equipment/system).  There  are  only  few  projects 
where a modified EPC was applied by ESCOs. (EC, 2016) 

16.2  Legal framework 

The  Energy  Efficiency  Law  (EEL,  Number  5327)  adopted  in  2007  and  revised  in  2011 
stipulates  the  definition  of  energy  services  and  set  the  basic  requirements  for  the 
implementation of energy services in Turkey. 

This  Law  prescribes  the  training  of  energy  managers  and  energy  auditors  as  well  as 
procedure  for  authorization  of  the  EDV  (ESCO)  companies.  The  General  Directorate  for 
Renewable Energy is the authorized body for issuing authorization for EDVs. A company 
to be authorized as EDV has to meet certain requirement as: to have minimum certified 
engineers,  to  hold  a  quality  management  certificate  according  to  EN  ISO  9001  and  to 
have facilities and equipment authorized by the Turkish Accreditation Agency. 

There  are  two  types  of  certificate:  A  and  B.  For  getting  A  class  certificate  the  EDV  has 
(Akuner 2015): 

11  In  the  Turkish  terminology  ESCOs  are  called  as  «Energy Efficiency  Consulting  Company  –  Enerji Verimililiği 
Danışmanlık  Şirketi (EVD)» defined by Energy Efficiency (EE) Law in 2007. 

62 

 
                                           
—  To hold a TS EN 9001 certificate and 

—  for  the  industrial  sector:  in  the  desired  sub-sectors  at  least  1  project  with  an 
agreement of 25 million TL (about EURO 7.756 Million 12) and totally energy efficiency 
projects having over 250 million TL (about EURO  77.566 Million) budget and also at 
least  one  project  component  related  to  direct  improvements  of  process  and/or 
process instruments; 

—  for  the  building  sector:  at  least  one  project  with  an  agreement  of  10  million  TL 
(around  EURO    3.1  Million)  and  totally  energy  efficiency  projects  having  over  100 
million TL (around EURO  31 Million) budget. 

For  an  ESCO  that  only  provides  expertise,  a  class  B  certificate  is  given  which  shall  be 
renewed every 3 years. 

If  any  ESCO  could  not provide  the  guaranteed  energy  saving  potential  at least  3  times, 
ESCOs’ certification shall be terminated for 1 year. (Akuner 2015) 

In  the  legislation,  industrial  and  building  sub-sectors  for  ESCO  (EVD)  services  are 
defined. 

 The Industrial sector is subdivided in 6 sub sectors: (Akuner 2015) 

—  Iron and Steel; 

—  Chemistry and Petro chemistry; 

—  Stone, Sand and Mining; 

—  Pulp-paper and Textile; 

—  Food and  

—  Transportation. 

There are two sub sectors in the building sector: 

—  Residential and 

—  Commercial. 

In July 2012, the Communiqué on the Energy Efficiency Support (CELL) was issued. This 
stipulated the principles and procedures to be enforced by the universities, chambers of 
mechanical and electrical engineers, and ESCOs in order to ensure a proper execution of 
energy services in the industrial and building sector. 

In addition to the already approved strategic documents for improvement of EE in Turkey 
there are the EE Strategic Paper 2011-2023 and 10th Development Plan 2014-2018, since 
2014  with  the  support  provided  by  the  EU  and  EBRD,  Turkey  has  worked  on  the 
preparation of a National Energy Efficiency Action Plan ("NEEAP") as set out under Article 
24(2) and Annex XIV of the Energy Efficiency Directive with appropriate adaptation of the 
content  of  Turkey's  situation  and its  2023  energy  efficiency  targets.  The  main  objective 
of  the  NEEAP  is  to  help  the  Turkish  Government  to  ensure  that  Turkey  can  continue  to 
successfully  improve  its  energy  efficiency  performances  and  to  harmonies  its  strategy 
with the European Union's 2012 Energy Efficiency Directive (currently 2012/27/EU) (the 
"Directive"), in the scope of the EU Accession negotiations (Calikoglu, 2015). 

16.3  Barriers to the development of the energy service market 

The  main  barriers  for  development  of  the  ESCO  market  in  Turkey  are  (EC,  2016):  EC, 
2016 

—  Legal: Legislation related to the local self-government (municipalities) is not in favour 
for  developing  ESCO  services  in  municipalities  (see  below).  Procurement  rules  are 
very  strict  and  complicated.  Public-private  partnership  rules  are  very  strict.  An 

12 Exchange rate on 15.03.2016 1 TRY =0.31 EUR 

63 

 
                                           
appropriate  legislation  for  the  promotion  of  EE  in  multi  apartment  building  (housing 
sector) is not present. 

—  Financial:  Lack  of  appropriate  form  of  financing  (including  incentives)  for  energy 
services  and  ESCOs  for  building  sector  and  SMEs.  In  the  market,  incentives  have 
been  provided  by  the  government  only  for  the  industry  sector;  specifically,  for  the 
large industrial enterprises but they are not enough. Other specific incentives should 
be  developed  and  applied  to  SMEs  and  especially  to  the  building  and  commercial 
sector.  Because,  the  incentives  from  the  government  has  leverage  effects  meaning 
that providing one unit could result in additional investment of 10 units as stated by 
the  ESCOs.  Absence  of  a  national  “Energy  efficiency  fund”  which  can  finance  EE 
projects in the residential buildings and SMEs based on an ESCO concept. Commercial 
banks  are  manly  focus  in  financing  of  EE  projects  in  industrial  enterprises.  They  do 
not  have  appropriate  portfolio  or  are  reluctant  to  finance  EE  in  the  residential  and 
commercial sector. Therefore ESCOs shall finance the projects with own equity. 

Other barriers that hamper the development of the ESCO market are (EC, 2016): 

—  Lack of energy database especially for building and commercial sectors. 

—  Lack of system for monitoring and verification of energy savings. 

—  Lack of independent “energy agency” like institution to shape the market with strong 

control mechanism. 

—  Lack of strong umbrella institution (association) for ESCOs, which will promote ESCO 
business among public and industrial sectors, and will represent the interest of ESCOs 
in different governmental bodies for the development of ESCO legislation. 

—  Lack  of  understanding  of  EPC.  Only  very  few  demonstration  projects  have  been 
realized under EPC. Therefore, the EPC concept is not very well known among public 
entities on national and local level. 

16.4  Recommendations to overcome the existing barriers 

Some steps and activities must be carried out to address gaps (EC, 2016): 

●  At  national  level,  an  effective  and/or  independent  institution  (e.g.  energy 
agency)  for  a  proper  management,  control,  verification,  validation  and 
database  formation  should  be  established.  This  institution  should  apply 
incentives/penalties effectively. 

●  Creation of independent institutions for monitoring, validation and verification 

of the EE projects according to specified international criteria. 

●  Standard  EPC  scheme  should  be  developed  and  used  in  demonstration 
projects (recovering as much energy saving potential guaranteed as possible) 
with 10-15 years contract durations. 

●  There  should  be  more  active  and  financially  strong  umbrella  institution  like 

associations for ESCOs/EVDs in the market. 

● 

“Energy efficiency fund” should be developed by the government, international 
funding  institutions  and  local  banks  for  the  effective  usage  of  allocated  funds 
in long terms and low rates. 

●  Banks providing long term and low interest credits/loans  

●  For comparison within the sectors, reference performance indicators should be 
developed  and  calculated  by  user-friendly,  verified  tools/programs  and  their 
result should be publicly available. 

●  Local  banks  should  be  trained  or  cooperate  with  EE  experts  in  terms  of  EE 
technology,  products  and  systems  for  evaluating  EE  projects  on  the  basis  of 
true performance criteria. 

64 

 
●  Correct  understanding  of  the  EPC  concept  and  developing  demonstration 
projects  by  international  donors  in  order  to  demonstrate  high  energy  saving 
potentials of using new EE technologies and to show the benefits of EPC. 

16.5  Energy services in the public sector and commercial sector 

ESCOs  are  not  so  much  involved  in  implementation  of  EE  projects  in  the  public  sector 
(especially  in  municipalities)  since  they  are  facing  with  legal  and  other  barriers  that 
hamper  the  introduction  of  the  ESCO  concept.  Therefore,  ESCOs  are  not  active  in  this 
segment of the market for energy services. 

The main barriers are as follows: 

—  Limited number of creditworthy municipalities and borrowing capacity. 

—  Legal Limitations on Municipal Borrowing. 

—  Lack of multi years budgeting in municipalities and retention of energy savings. 

—  Lack of Separate Accounts for Capital and Operating Expenditures. 

—  Lack  of  budget  autonomy.  The  municipalities  depend  on  the  state  budgets  for  their 
operational  budgets.  Future  energy  savings  would  result  in  a  deduction  from  their 
operational  budgets,  and  the  saved  energy  cost  cannot  be  used  for  other  local 
purposes—creating  a  huge  disincentive  to  save  energy.  Therefore,  the  central 
government has high control over local budgets; 

—  Short-Term Perspective of Local Political Decision Makers. 

—  Complex public procurement procedures. 

—  Lack of financing mechanisms especially from the government side. 

—  Lack of awareness and interest in financing EE. 

Some of the potential solutions to overcome the above mentioned barriers are: 

—  Reclassifying  EE  investments  as  utility  services,  where  long-term  contracts  are 

implicitly allowed; 

—  Increasing local revenue sources; 

—  Preparation and implementation of Municipal EE Action Plans (MEEAPs) or Sustainable 

Energy Action Plans (SEAPs). 

—  Standardization  of  documentation  and  procedures  for  public  procurement  of  EE 

equipment and services. 

—  Development  and  implementation  of  EE  pilot  project  based  on  simplified  and 

standardized EPC. 

—  Implementation of training and capacity building programs at national and local level. 

The commercial sector has significant potentials for EE and therefore shall be of interest 
of  ESCOs.  These  are  mainly interested  in  projects  in  the  hotels  on  the  Turkish  coast  as 
well  as  in  the  commercial  buildings.  Projects  for  improvement  of  HVAC  installations,  in 
door  lighting,  installation  of  monitoring  and  controlling  of  energy  consumption  in 
commercial  buildings  can  be  realized  by  ESCOs.  The  foreign  ESCO  companies  are  very 
interested in investment in EE in the commercial sector, because of its huge potential for 
energy  services.  In  the  past  few  years  some  of  them  already  realized  projects  in  larger 
shopping  malls.  These  projects  were  implemented  through  EPC  and  funded  by 
commercial  banks.  The  foreign  ESCOs  want  to  demonstrate  a  full  range  of  energy 
services provided by ESCOs as well as benefit of EPC. 

65 

 
16.6  Energy services in the residential sector 

Although the Turkish residential sector has a huge potential for energy services it is not 
attractive  for  ESCO  because  of  several  barriers.  Some  of  these  barriers  are  (EC  JRC, 
2016): EC, 2016 

—  Lack  of  primary  or  secondary  legislation  for  the  creation  of  Homeowner  association 

(HOA) in multi apartment buildings or not in enforced. 

—  Small project size and therefore relatively high transaction costs; 

—  Low energy tariffs (especially for electricity); 

—  Perception of high risk by commercial banks; 

—  Relatively high commercial bank interest rates; 

Some  of  the  recommendations  to  overcome  existing  barriers  in  the  residential  sector 
could be: 

—  Formation  of  effective  Homeowner  Associations  that  have  legal  status  in  order  to 
open  bank  accounts,  borrow  money  for  building  improvements,  enter  into  contracts 
with service providers. This will contribute to faster penetration of energy services in 
the  residential  sector  in  Kosovo.  Implement  Financing  and  Incentive  Schemes  for 
Family Houses will stimulate the investment in EE. 

—  Implement Financing and Incentive Schemes for the residential sector; 

—  Increase information outreach and organize  awareness raising campaign to promote 

EE, ESCO and benefit of energy services among homeowners; 

—  Implementation of energy certification schema for buildings (13) 

16.7  Energy services in the industrial sector 

The EDV (ESCO) companies are involved in the realization of different EE projects manly 
in  large  industrial  enterprises.  They  use  standard  service  or  sales  contracting.  Modified 
EPC were used only by few ESCOs. The finding of the projects is provided by ESCOs own 
equity or by the customers if they are large industrial enterprises. Third part financing is 
not  very  common  since  the  credit  lines  from  commercial  banks  are  not  attractive 
conditions. 

The Turkish government focuses on the industrial sector regarding the implementation of 
EE policies, since this sector plays the key role in the fast growing Turkish economy (6th 
biggest economy in Europe). 

Therefore,  the  Turkish  government  has  developed  and implemented  incentives  schemas 
for the implementation of the “Energy Efficiency Projects (VAP)” in industry. Since 2009, 
5 million Turkish lira (around EUR 1.6 Million) has been allocated each year for “Energy 
Efficiency Projects (VAP)” in industry. (Akuner 2015) 

Up to 30% of the total project investment or up to EUR 113,000 can be subsides by the 
government. Since 2014 the industrial enterprises which have interest to apply for state 
subsidies have to implement the  ISO 50001  Energy Management Standard and to carry 
out  energy  audit.  The  Energy  Efficiency  Coordination  board  (EECB)  approves  the  EE 
projects that should be supported by the state incentives (Celikoglu, 2015). In addition, 
starting  from  2008  industrial  enterprises  with  100  TOE  or  greater  energy  consumption 
should share their annual energy consumption and CO2 emission figures (EC, 2016). 

13  Up  to  May  2017  all  buildings  in  Turkey  should  obtain  their  energy  certificate.  If  they  not  have  certificate 
cannot be sell or rented after May 2017. For the buildings with energy class lower than C energy class, selling 
or rental price will be lower. 

66 

 
                                           
 
The  numbers  of  the  “Energy  Efficiency  Projects  (VAP)”  in  industry  supported  by 
governments are (EC, 2016): 

2009 – 17, 2010 – 15, 2012 – 11, 2013 – 59, 2014 – 68, 2015 – 72 

The voluntary agreements with industrial enterprises are another form of state incentives 
for the industry in Turkey. Forty industrial plants have been applied for this kind of state 
incentives  and  25  agreements  have  been  signed  since  2009.  However,  only  7  projects 
were successful (Celikoglu, 2015). 

EDV  companies  can  be  involved  in  the  preparation  and  implementation  of  “Energy 
Efficiency  Projects  (VAP)”  as  well  as  of  voluntary  agreement.  Some  of  the  ESCOs  are 
involved in preparation of project applications. 

Although the industrial sector is the most covered by the ESCOs, there are still issues for 
further  development  of  ESCO  services.  Some  of  them  identified  by  experts  are  (EC  JRC 
2015): 

—  Lack of interest of the owners to invest in EE. 

—  lack of specialized EE experts for the different industrial processes. 

—  lack  of  exact    measurement  of  energy  consumption  within  an  industrial  plants 

(installation of individual energy consumption  meters). 

—  payback period concerns (i.e. acceptable range of 1-5 years). 

—  not aware of different funding mechanisms. 

16.8  Conclusions 

The  energy  demand  of  Turkey  has  increased  of  about  4.6%  per  year  since  1990.  It  is 
expected to grow to 5% annually to 2023. Until 2020 the electricity demand will increase 
to  6.7%  according  the  low  case  scenario  annually  or  7.5%  according  to  the  high  case 
scenario. The required investment in energy sector will be more than $ 130 billion up to 
2023.  Savings  potential  conservatively  estimated  at  about  20%.  Over  50%  of  industrial 
EE projects expected to have payback period of less than 2 years. Economy would benefit 
from reduced demand for energy imports and CO2 reduction (Celikoglu, 2015). 

The  vision  of  the  government  is  to  reduce  the  energy  intensity  (still  above  developed 
countries) at 20% until 2023 compared to 2011. EE is recognized as a win-win situation 
and  therefore  the  government  aiming  to  stimulate  the  investment  in  EE  though 
introducing incentives in industry. However, these are not enough to achieve the overall 
energy  targets.  The  private  sector  should  be  more  involved  in  EE  investment  and  not 
only  in  the  industrial  sector.  ESCOs  (EDV)  companies  can  mobilize  investment  and 
provide the necessary know how for project development and project implementation in 
residential  and  commercial  sectors.  However,  without  any  state  support  (legislative  and 
financial)  these  sectors  are  still  not  attractive  for  ESCOs.  The  public  sector  especially 
municipalities should be better informed about energy services and ESCO business. 

16.9  References 

Acuner,  Ebru.  2015.  “Status  of  the  ESCO  Market  in  Turkey”  presentation  held  on  the 
“High  Level  Workshop  on  Effective  Energy  Policies,  New  Financing  Instruments  and 
ESCOs “ in Varese on 11.11.2015 

http://iet.jrc.ec.europa.eu/energyefficiency/node/9103 

Calikoglu,  Erdal.  2015.  “Resent  Development  in  the  EE  Policies  in  Turkey”  presentation 
held  on  the  “High  Level  Workshop  on  Effective  Energy  Policies,  New  Financing 
Instruments and ESCOs“ in Varese on 11.11.2015 

http://iet.jrc.ec.europa.eu/energyefficiency/node/9103 

67 

 
Contacted  Experts  -  Survey  respondents:  Ebru  Akuner,  Energy  Institute  -  Istanbul 
Technical University, Istanbul, Turkey 

68 

 
 
 
17 Development of the ESCO Market in Ukraine in 2015 

17.1  General overview of the market 

The ESCO market in Ukraine has changed from stagnation of the market (in the period of 
2013-2014) to its growth in 2015. This change of the market is associated with the new 
legal framework, which was adopted by the Parliament of Ukraine and formed the energy 
service market in the public sector in 2015 (EC JRC Survey 2016). 

As  of  2015  about  30  energy  service  companies  (ESCO)  were  active  in  the  Ukrainian 
market. Generally, these are 24 medium-size private companies, 4 municipal ESCO and 2 
communal energy suppliers companies, which were established following the ESCO model 
(EC JRC Survey 2016). 

The  main  types  of  projects,  realized  by  ESCO,  are  thermal  modernization  of  municipal 
buildings  and  transition  to  a  bio  fuel-based  heating  system  of  municipal  buildings. 
Ukrainian ESCOs mainly utilize direct funding scheme (from own equity) and bank loans 
(EC, 2016). 

Type of projects realized by ESCOs are (EC, 2016): 

—  street lighting – 10% of the projects, 

—  improvement of heating and cooling in buildings – 20% of the projects, 

—  improvement of district heating – 5% of the projects, 

—  renovation of building envelope – 60% of the projects; 

—  other – 5% of the projects. 

Type of Contract used for the realization of the projects (EC, 2016): 

—  Energy Performance Contracts (EPC) - (in 90% of the projects) 

—  Energy Supplying Contracts (ESC) - (in 10% of the projects) 

17.2  Legal framework 

The  Law  No.  327-VIII  “On  the  Implementation  of  New  Investment  Opportunities, 
Ensuring Rights and Legitimate Interests of Individual Entrepreneurs for the Performance 
of  Large-Scale  Energy  Sector  Modernisation”  (“ESCO  Law”)  was  adopted  by  the 
Parliament on 9th of  April 2015. The ESCO law defines the concept of "energy services" 
and "energy service agreement", establishes basic conditions to regulate the relationship 
between  the  customer  and  the  energy  service  providers;  defines  the  mechanism  for 
value assessment of services allowing budgetary institutions to be involved into one plus 
years  long  energy  service  contracts,  secures  payments  for  investors,  the   exclusively 
monetary  remuneration for  savings achieved  within the framework of  an energy  service 
contract; defines a transparent mechanism for the selection of the tender  winner for the 
provision of energy services (European Ukraine Energy Agency 2016). 

The purpose of the “ESCO law” is to create a legal framework for the introduction of new 
investment  opportunities  (including  ESCO)  in  the  public  sector,  ensuring  the  rights  and 
legal  interests  of  business  entities  while  conducting  a  large-scale  energy  efficiency 
projects  through  the  mechanism  of  energy  services.  (European  Ukraine  Energy  Agency 
2016)  An  investor  obtains  guarantees  of  return  of  investments  in  10  years  after  the 
implementation of energy-efficiency measures on account of saving of resources deriving 
from  such  measures.  The  government  will  not  make  any  investments;  moreover,  it  will 
receive  up  to  10-20%  of  saved  funds,  while  up  to  80-90%  will  go  to  the  investor 
(Khachaturian et al. 2015). 

Law  No.  328-VIII  “On  Changes  in  the  Budget  Code  of  Ukraine  (On  Introduction  of  New 
Investment  Opportunities,  Guarantee  of  the  Rights  and  Lawful  Interests  of  Business 
Entities for the Large Scale Energy Modernization)" was adopted on 9th of April 2015. 

69 

 
Public entities carry out public procurement of energy services according the procedures 
prescribed  by  the  Law  of  Ukraine  "On  state  purchases"  for  procurement  of  services, 
taking into account the peculiarities set by the ESCO Law. 

In addition, in 2015 two by-laws prepared on the basis of the two above mentioned Laws 
were approved: 

—  Model  Energy  Servicing  Agreement  (ESA)  developed  in  line  with  the  new  Law  No. 

327-VIII and approved by the Act of the Cabinet of Ministers. 

—  The  methodology  for  estimation  of  the  baseline  annual  level  of  consumption  of  the 
fuel and energy resources and utility services (Part 1 of Article 3 of the Law No. 327-
VIII)  –  Act  of  the  Ministry  of  Regional  Development,  Construction  and  Housing  and 
Utility Sector. 

The  agreement’s  primary  goal  is  to  implement  international  ESCO  practice  in  Ukraine, 
which  is  widely  recognized  as  an  efficient  financial  vehicle  for  funding  energy  efficiency 
programs. 

The model ESA provides the following (CIM- Law Now 2016): 

●  An  energy  service  is  a  package  of  technical  and  organizational  energy 

efficiency measures, provided by an ESCO for a customer; 

●  The ESCO’s remuneration is directly tied to the savings achieved. The cost of 
the  initial  investment  and  ongoing  management  will  be  paid  back  from  the 
savings over the term of the contract (10 years maximum). If the savings fall 
short,  the  ESCO  will  either  implement  additional  measures  or  cover  the 
shortfall itself; 

● 

o 

In the ESA the ESCO and the customer shall determine: 

- the customer’s baseline consumption of energy resources and utilities (by  

volume and in monetary form), and 

o 

- the stipulated level of energy saving; 

The baseline consumption will be equal to the customer’s average annual consumption of 
energy resources and utilities over the last 3 years; 

The  level  of  energy  savings  is  calculated  as  the  difference  between  the  baseline 
consumption and the  customer’s actual consumption, multiplied by the tariffs applicable 
during the reporting period; 

The annual payments to the ESCO may not be less than 80 per cent and may not exceed 
90 per cent of the customer’s annual energy savings. 

17.3  Existing  barriers  to  the  development  of  the  energy  service 

market 

—  Legal:  The  ESCO  law  and  the  basic  models  of  energy  service  agreements  (actually 
EPC)  have  been  developed  by  the  State  Agency  on  Energy  Efficiency  and  Energy 
Saving  of  Ukraine  in  2015  and  have  had  no  practical  implementation  yet.  The 
implementation of the legislation has to be enforced by the authorities (EC, 2016) 

—  Financial:  currently,  the  financial  source  for  ESCO  projects  is  the  Western  banks’ 
funding.  The  current  financial  stability,  in  which  Ukrainian  banks  have  to  provide 
short-term  loans  at  very  high  interest  rates  -  from  20%  to  25%  and  even  30%  in 
some  cases  -  even  more  difficult  access  ESCO  to  finance  (National  Bank  of  Ukraine, 
2015).  Given  the  limited  financial  resources,  ESCO  usually  are  not  able  to  put  into 
practice  Energy  Services,  the  appropriateness  of  which  unaudited  and,  at  the  same 
time unable to finance or access to finance those services. Under the conditions of the 
annual inflation rate at around 43% currency risks are extremely high. Energy tariffs 

70 

 
are approved in a national currency and the exchange rate is difficult to forecast and 
manage (EC JRC Survey 2016). 

Other barriers for development of the ESCO market are (EC JRC Survey 2016) 

—  The low level of demand for the Energy Service; 

—  Inconsistencies between supply and demand in the Energy Services; 

—  The low level of understanding of the benefits of ESCO. 

17.4  Recommendations to overcome the existing barriers: 

Four  steps  with  a  focus  on  supply,  demand  and  understanding  /  awareness  for  the 
development  of  an  active  market  for  ESCO  to  implement  are  recommended  (EC  JRC 
Survey 2016): 

—  From the supply side - Facilitate access to financing. 

—  On  the  demand  side  -  Introduce  measures  to  stimulate  investment  in  energy 

efficiency. 

—  Achieving  match  supply  and  demand  -  build  capacity  and  improve  coordination 

among market participants, which will help balance supply and demand. 

—  Increased understanding - Provide informational support for the ESCO model. 

—  Implement and improve of the basic EPC model for the sector of municipal buildings.  

—  Under  the  condition  of  high  inflation  rate  the  currency  risks  will  remain.  It  is 
necessary to  establish the government guarantee fund, which is subsidized from the 
budget,  in  order  to  reduce  the  currency  risks  in  the  projects  of  municipal  buildings 
retrofit. 

—  It is essential to establish municipal ESCOs and energy agencies, which would receive 
the functions of project management and operation throughout an entire project  life-
cycle. 

17.5  Energy services in the public and commercial sector 

There are 80 000 municipal buildings in Ukraine, which were built in the period of 1930-
1990 and require now  a thermal modernization. These buildings consume 1.65 milliards 
m³  of  natural  gas  and  55  milliards  kWh  of  electricity  annually.  Taking  into  account  the 
retrofit  of  engineering  systems  of  buildings,  total  investment  is  considered  to  be  13 
milliards euro. Annual loss of the budget resources is around 1.25 milliards euro (EC JRC 
Survey 2016). 

The number of realized projects is amounted about 10 annually in Ukraine, which covers 
2-3  buildings  in  the  municipalities  (cities).  The  projects  usually  include  replacement  of 
windows,  installation  of  local  heating  systems,  biofuel  boilers  and  rarely,  thermal 
modernization of buildings (EC JRC Survey 2016). 

The  main  problem  connected  to  the  absence  of  legal  framework  for  energy  services, 
which  occurred  before  2014,  have  been  diminished  by  two  new  laws  (see  above). 
However, there is an absence of implementation practices related to the new ESCO law. 
It  is  expected  that  in  2016  these  laws  will  be  thoroughly  tested  in  some  cities  due  to 
projects financed by the EBRD and NEFCO loans (EC JRC Survey 2016). 

The lack of experience of EPC as a business models for improvement of energy efficiency 
in  public  buildings  is  a  major  know-how  barrier  which  has  to  be  overcome  through  the 
trainings  of  local  decision  makers,  administrative  experts,  and  potential local  facilitators 
organized by International Organization as: GIZ, USAID and EBRD. 

The  barriers  that  hamper  the  faster  development  of  the  ESCO  market  in  the  municipal 
buildings sector identified by experts are (EC JRC Survey 2016): 

71 

 
—  multi years budgeting, 

—  borrowing of municipalities limited  by legislation, 

—  insolvency of municipalities, 

—  complicated public procurement procedures, 

—  accounting procedures. 

“EnPC-INTRANS  -”  is  an  EU  project  funded  in  the  framework  of  the  Horizon  2020 
Program  of  the  European  Union,  aiming  to  develop  capacity  building  on  Energy 
Performance  Contracting  in  European  Markets  in  transition.  Since  the  EPC  for  public 
buildings  is  a  new  concept  for  all  stakeholders  and  actors  in  the  country,  all  projects 
initiated  by  participants  in  EnPC-INTRANS  project  may  be  monitored  on  capacity 
development  during  the  project  duration,  or  during  the  first  few  years  following  the 
completion of the project (Wielhelm 2015). 

17.6  Energy services in the residential sector 

The  implementation  of  the  ESCO  and  EPC  concept  in  the  residential  sector  started  in 
Ukraine  in  2001.  Since  2001  around  100  projects  were  implemented  in  residential  and 
public  buildings.  These  projects  were  financed  through  the  grants  provided  by 
international  donors  and  IFIs.  Most  of  them  were  successful  and  showed  high  energy 
saving  potential  of  both  residential  and  public  buildings.  However,  this  project  concept 
was not sustainable, since the funding was provided only by grants. Third part financing 
was not introduced. 

Mainly, the development of the ESCO market in the Ukrainian residential building sector 
is hampered by barriers (legal and financial). These barriers are: (EC 2016) 

—  Absence of owners association in multi apartment buildings. 

—  Low energy prices for residential sector. Because of the subsidized tariffs the payback 
periods of the majority of projects are beyond the boundaries of commercial interest.  

—  Lack  of  capacity  and  willingness  of  local  financial  institutions  to  invest  in  energy 

efficiency in the residential sector. 

—  Legislative Barriers for lending to Homeowner associations. 

Since  several  years,  EBRD  has  provided  technical  assistance  for  improving  the  energy 
performance  of  residential  buildings  to  assist  the  government  of  Ukraine  to  prepare  for 
introduction  of  market  instruments  for  energy  efficiency  measures  in  residential 
buildings. The program includes further development of legislation and capacity building 
to lending for EE in residential buildings. ESCOs are perceived as a possible solution for 
underinvestment  in  residential  buildings  and  therefore  are  included  in  the  framework  of 
the EBRD program (Borysova 2015). 

In addition, in the City of Dnepropetrovsk a pilot project has been implemented through 
EBRD  in  buildings  including  financing  of  identified  measures.  The  Pilot  project  in 
Dnepropetrovsk  establishes  commercial  concept  of  Energy  Performance  Contracting 
(EnPC)  and  demonstrates  the  related  financing.  In  the  framework  of  the  ESCO  Budget 
Investment Program approved by the City Council of Dnepropetrovsk  were identified 71 
building  for  energy  efficiency  renovation  and  4  tenders  for  EPC  were  prepared.  The 
payback  period  of  the  projects  is  less  than  7  years.  EBRD  provides  funding  for  the 
technical component of this program with an amount of EUR 588,000 (Borysova 2015). 

17.7  Energy services in the industrial sector 

Practically there is no ESCO market for the industrial sector in Ukraine nowadays. In the 
last  10  years,  especially  in  the  period  of  2013-2015,  Ukrainian industry  lost  its  position 
on the market and now it is being destroyed. It would be singular if any retrofit projects 
are  implemented  by  the  real  owners  without  involving  energy  service  companies. 

72 

 
Moreover,  gradually  the  energy  management  system  is  being  implemented  and  energy 
audits are conducted, but there is no market demand on external ESCOs. (EC 2016) 

The  Barriers  for  implementation  of  EE  projects  in  industry  (e.g.  lack  of  in  house 
expertise, lack of interest of management are (EC 2016): 

—  Low interest of enterprises management in energy efficiency: 

—  Financial constrains; 

—  Lack of qualification and understanding of the staff for energy efficiency in industrial 

enterprises. 

17.8  Conclusions 

The adopted legislation for energy services establishes the legal and economic principles 
of  energy  services  to  improve  the  energy  efficiency  of  the  government  and  municipal 
property (buildings, energy utilities, street lighting etc.). 

High energy saving potential in public buildings, lack of qualified personnel in the public 
sector  (at  national  and  local  level)  and  public  utilities,  able  to  identify  and    to  manage 
energy efficiency projects through the entire project life-cycle, new legislation for energy 
efficiency ( including energy services) shall raise the interest of the public sector for more 
investment  in  energy  efficiency  projects  These  measures  will  enable  resolving  the  issue 
of  energy  efficiency  in  budgetary  sphere  and  covering  more  objectives  within  10  years, 
that  will  reduce  current  expenditures  of  municipal  budget  for  maintenance  of  buildings. 
Energy saving companies can take the leading role in implementation of these projects. 

17.9  References 

Khachaturian,  Armen,  Yaroslav 
in  Mondag 
http://www.mondaq.com/x/400036/Energy+Law/Ukraine+Supports+Use+of+Energy+Se
rvice+Agreements 

  2015.  Article  published 

  Petrov. 

European  Ukraine  Energy  Agency,  2016.  Official  web  page  of  the  European  Ukraine 
Energy  Agency  visited  on  19.02.2016  http://euea-energyagency.org/en/news-and-
events/market-news/1282-law-on-esco-came-into-force  

CIM-  Law  Now,  2016.  “Ukraine:  Government  adopts  framework  for  ESCO  agreements” 
Article  published  on  15.11.2015  http://www.cms-lawnow.com/ealerts/2015/11/ukraine-
government-adopts-framework-for-esco-agreements 

Wilhelm,  Bruno.  2015.  “Baseline  Study  on  current  state  of  EPC/ESCO  Project 
Development and Implementation in the Public Sector of Partner Countries”  

Borysova,  Olena.  2015.  “EBRD’s  activities  and  financial  support  for  energy  efficiency  in 
buildings in Ukraine” Presentation on the Workshop on Energy Efficiency in Buildings and 
Advanced District Heating organized by International Energy Agency held on 23.03.2015 
in Kiev, Ukraine 

https://www.iea.org/media/workshops/2015/ukraine/Olena_Borysova_2015_03_23_Kiev
.pdf 

Contacted Experts - Survey respondents: 

Vasiliy Stepanenko, Ecosys, Ukraine 

Anatoliy Cherniavskyi, EE Expert, Ukraine 

73 

 
 
 
 
 
18 Development of the ESCO Market in Belarus in 2015 

18.1  General overview of the market 

ESCO market in Belarus is still moderate with slow progress in the last years. 

Several  energy  service  companies  operate 
in  Belarus.  Companies  such  as 
BelininvestESCO, "Conecticum", ENECA and Vneshenergiservice, provide energy services 
with similar contracts to ESC. Mostly of the implemented projects regard improvement or 
reconstruction  of  heat  energy  supply  systems  and  networks,  since  in  this  sector  the 
potential  for  energy  savings  are  large  because  of  the  old  equipment,  installation  and 
huge energy loses. The energy supplier systems are mostly state owned. (UN Economic 
Commission for Europe.2013) 

However the number of companies in the private sector that are really able to justify and 
qualify  for  ESCO  services  is  not  very  large,  as  ESCOs  will  only  seek  companies  with  a 
sound  credit  rating  and  good  trading  record,  i.e.  those  that  are  able  to  satisfy  the 
investors of their long term survivability. (Iqbal et al.2006) 

On the whole, ESCO operation could be possible in the private sector, mainly with larger 
robust  organizations.  However,  while  the  public  sector  organizations  in  general  may 
present a lower credit risk to the ESCO, the number of restrictive practices in that sector 
can make the breakthrough very difficult for private ESCOs. 

18.2  Legal framework 

Although  the  existing  laws  do  not  provide  for  ESCOs  explicitly,  the  ESCO  concept  and 
contracts  may  implicitly,  be  considered  permitted  within  the  existing  laws  of  Belarus. 
However,  taking  into  account  Belarus’  national  culture  and  practices  for  running  a 
business,  it  is  almost  certain  that  a  dedicated  law  to  enable  ESCO  operation  would  be 
required (Iqbal et al.2006). 

According  to  the  Investment  Code  of  Belarus,  the  Government  could  provide  the 
following types of financial incentives (Iqbal et al.2006): 

—  Lower rates of taxation and import duties; 

—  Guarantees  to  IFIs,  foreign  investors,  foreign  and  Belarusian  banks  financing 

investment projects; and 

—  Direct financing of investment projects from the national budget. 

Although  at  present,  there  is  no  specific  ESCO  contract  provision  in  the  Belarusian 
Contract law, a so called “mixed type” contract can cover most elements for the provision 
of  standard  services.  An  ESCO  can  act  as  a  borrower  and  investors,  or  as  a  contractor 
and subcontractors like consultants, engineering/maintenance contractors and equipment 
suppliers. 

The standard contract type suggested by Belarusian Civil Code may be devised to cover 
all  aspects  of  ESCO  operation  but  to  achieve  this  in  practice,  it  would  become 
cumbersome and major amendments will be necessary. 

A "Simple Project Agreement" (SPA) is a contract model similar to an ESCO contract, but 
developed  for  the  Belarus  market.  This  model  of  contract  has  been  used  by  the 
International  Energy  Centre  (IEC).  The  International  Energy  Centre  was  established  in 
2010  as  a  unit  at  the  Energy  Efficiency  Department  to  help  realizing  energy  efficiency 
policy through initiating energy efficiency projects. The Energy Centre was further utilized 
as an important component of the Project “Removing Barriers to Energy Efficiency in the 
State Sector in Belarus” implemented between 2007 – 2011 and whose objective was to 
increase internal investments in EE projects in the public sector. 

“Belarusian  Government  actively  welcomes  foreign  investment  and  foreign  technology, 
and the issues of safeguards are well spelt out in Belarusian legislation. A  large number 

74 

 
of  successful  foreign  investment  projects  are  now  in  progress  However,  it  has  to  be 
pointed  out  that  many  projects  with  foreign  participation  have  not  been  entirely 
successful.  The  reasons  for  this  include  inadequate  assessment  of  the  risks  involved, 
changes in taxation, exchange rate fluctuations, rising labour costs etc. Therefore, a pilot 
ESCO with foreign participation will need to make a very careful assessment of the risks, 
and be properly safeguarded by a tight legal document.” (Iqbal et al.2006) 

18.3  Barriers for the development of the energy service market 

The main barriers for development of the market for energy services in Belarus are: 

—  Legal: Need for ESCO legislation and predefined EPC. The process of the adoption of 
the complete legislation for ESCOs has to be finished. Apart from that, some changes 
and  addition  are  needed  in  existing  legislation,  especially  regarding  the  public 
procurement. 

—  Financial: the Interest rates in Belarus are high and they vary from bank to bank. The 
Belarusian  cabinet  regulation  provides  for  low  interest  financing  specifically  for  the 
purposes  of  energy  saving  activities.  In  2013,  finance  for  such  activities  carried  on 
average  an  interest  rate  of  approx.  10-11%  for  USD;  32-35%  for  BYR.  (Grebenkov 
2013).  Most  ESCO  projects  need  loans  over  a  longer  term  period.  Some  Belarusian 
banks are now actively negotiating long term credit lines from foreign banks so that 
they may make longer term loans available to their borrowers. The banking sector is 
also overregulated by very prescriptive laws within the national banking code. Banks 
are  allowed  to  open  affiliate  companies  that  can  do  a  wider  range  of  financial 
activities including the provision of ESCO type services but they cannot act as ESCOs. 
In addition the grant funding does not provide motivation for other EE investments. 

Other barriers: 

—  Benefits from energy savings. The value of energy saved by an organization is lost in 
the overall cash flow of the company under the current accounting rules in Belarus. It 
gets transferred into a central budget elsewhere. Therefore organizations do not see 
any benefit from the energy they save and, hence, the incentive for saving energy is 
lost in the process. 

—  Lack of awareness and understanding of the ESCO concept among potential users and 

lenders. 

—  Very strict tendering rules applied to procurement in public sector. 

—  Business  and  banking  sector  in  general  are  not  directly  interested  in  funding  EE 

because of: (Grebenkov 2013) 

o  disincentive tariff mechanisms for independent energy producers 

o 

lack of knowledge and experience in EE project cycle and EE investment cycle, 
energy auditing, business planning and feasibility study for bankable proposals 

o 

limited foreign investments (by a factor of 10 less than for other EITs). 

—  Strict and complex bureaucratic procedures, delays and slow decision making process 

in the state owned organizations. 

—  Regulated Fuel Prices and Subsidies. The Government still regulates the energy prices 
and  provides  subsidies  for  households.  Also  there  is  differentiation  between  the 
energy  tariffs  for  private  and  for  the  state  owned  companies.  However,  the 
government can no longer support these subsidies, and gas, electricity and heat are 
distributed  to  consumers  at  cost,  and  certainly  above  the  cost  level  to  industries. 
Availability of cheap gas from Russia makes small scale production of electricity and 
heat very cost-effective. 

—  Lack of motivation on demand side. 

75 

 
Much of the economy is still controlled by the state, there are many restrictive practices 
in place and there is a lack of coordination between different government bodies. There is 
heavy  reliance  on  very  prescriptive  laws  and  detailed  instructions  and  regulations  in  all 
areas  of  business.  The  inability  of  organizations  to  keep  their  savings  remains  biggest 
disincentive. 

18.4  Recommendations to overcome the existing barriers 

Some recommendation to overcome the existing barriers could be: 

—  Development and implementation of favorable legislative framework for ESCO. 

—  Development of favorable financial and fiscal climate. 

—  Introduction  of  capacity  building  trainings  for  experts,  potential  ESCOs  and  public 

sector for energy services and ESCO concept. 

—  Motivation and Incentives for the investment in the residential sector. 

—  Removal of restrictive procedures in public procurement of energy services. 

—  Introduction of training within the banking sector for ESCO concept. 

18.5  Energy services in the public sector 

State sector in Belarus is the largest energy consumer of fuel and energy resources. This 
sector  accounts  for  68%  of  the  fuel  and  other  energy  resources  consumption  and  the 
fixed  basic  assets  represent  24%  of  GDP.  (Grebenkov,  2013)  The  state  sector  can  be 
divided  in  two  types  of  organizations:  state  self-financed  organizations  and  state 
budgetary  organizations.  The  self-financed  organizations  are  akin  to  state  enterprises. 
The Belarus government is the main stakeholders and appoints their management. They 
have  own  incomes  and  therefore  are  profit  motivated.  They  are  entitled  to  access 
innovation  funds  provided  by  their  oversight  organization  for  energy  efficiency 
investments (UNDP 2006). 

The  state  budgetary  organizations  are  financed  from  the  state  or  local  (municipal) 
budgets.  They  provide  services  free  of  charge  and  the  only  way  of  funding  is  the  state 
budgets and grants. 

Most  of  the  implemented  projects  in  the  state  organization  are  improvement  or 
reconstruction  of  heat  energy  supply  systems  and  networks,  since  in  this  sector  the 
potential for energy savings is large because of the old equipment, installation and huge 
energy  loses.  The  energy  supplier  systems  are  mostly  state  owned.  (UN  Economic 
Commission for Europe.2013) 

There are several EE investments instruments in place in Belarus (Grebenkov 2013): 

—  4  types  of  incentive  mechanisms:  subsidies,  feed-in  tariffs,  tax  remissions  (0.5  of 

profit tax), soft loan; 

—  EE investments:  owner’s equities, bank loans, Ministry of Energy’s Innovation Fund; 
Departmental  Innovation  Funds  and    state  and  local  budget  (repayable  and  non-
repayable); 

—  Revolving Fund with 7.5% interest rate. 

18.6  Energy services in the residential sector 

The future projections estimate the construction of 120 million m2 of new residential area 
during the period of 2012-2026 in the Republic of Belarus (UNDP 2012). 

Traditional approach to building design is one of the shortages of the Belarusian system, 
where the architectural design and the design of the buildings’ energy performance and 
HVAC  systems  are  obsolete.  Energy  efficiency  gains  are  primarily  sought  from 

76 

 
prescriptive  insulation  norms  of  the  building  envelope  without  considering  the  energy 
performance of the building and its HVAC system as a whole. 

The panel buildings using prefabricated elements with well-organized quality control and 
supervision at all production and construction stages are currently expected to have the 
best  compliance  with  the  adopted  norms.  The  survey  conducted  in  2006-2007  on  the 
energy  characteristics  of  old  (constructed  before  1993)  and  new  panel  buildings  with 
installed  heat  meters  support  this  assumption  showing  the  specific  heat  consumption  of 
monitored  panel  buildings  to  be  close  to  the  values  shown  in  the  design  documents 
(UNDP 2012). 

The Belarusian architects and engineers still lack the capacity and sufficient experience in 
designing  energy  efficient  buildings.  This  gap  can  be  filled  by  organizing  awareness 
raising  and  training  on  new  design  principles,  procedures  and  norms  along  with  the 
design  and  construction  of  selected  EE  demonstration  buildings.  However,  in  the 
framework  of  the  UNDP  Project  “Improving  Energy  Efficiency  in  Residential  Buildings  in 
the Republic of Belarus” training for energy experts and architects as well as for energy 
auditors  have  been  organized.  The  energy  certification  and  energy  audits  for  residential   
and public (state) buildings is regulated by the new legislation, prepared according to the 
EPBD  taking  into  account  Belarus  Norms.  In  addition,  several  pilot  projects  founded  by 
international donors and/or state budget have been implemented in Belarus. 

The  residential sector in Belarus is facing with a lack of financial incentives  to  stimulate 
the  construction  of  energy  efficient  buildings.  “While  the  development  and  effective 
enforcement  of  new  mandatory  minimum  energy  performance  standards  together  with 
the  adoption  of  a  new  energy  certification  and  labeling  system  for  buildings  should 
reduce  the  need  for  complementary  financial  incentives,  the  issue  may  still  need  to  be 
considered  during  project  implementation.  The  primary  interest  for  the  construction 
companies  and  investors  is  to  minimize  their  costs  by  just  taking  into  account  the 
mandatory  EE  requirements,  unless  they  can  recognize  some  real  value  added  and 
financial  benefits  from  complementary  EE  investments.  Similarly,  the  buyers  of  new 
apartments  will  primarily  look  the  up-front  costs.  The  long  term  energy  savings  are  not 
currently  appreciated  by  most  purchasers  of  apartments,  should  the  initial  investment 
need be higher.” (UNDP, 2012) 

The Law of the Republic of Belarus "On joint housing ownership" (1998) created the basis 
for  establishing  the  first  housing  associations  (condominiums),  which  are  currently  over 
750.  From  these,  630  are  engaged  in  the  maintenance  and  repair  of  buildings.  The 
Council of Ministers of Belarus adopted in 1998 a Resolution "On Approval of the Typical 
Statute  of  Condominiums,  Model  Foundation  Agreement  of  Creating  Condominiums  and 
Typical  Agreement  on  Joint  Housing  Ownership”,  which  stipulates  the  right  for 
condominiums to use loans. Condominiums can be fully involved in implementing energy 
saving measures in existing buildings once the related legal and regulatory framework is 
further  developed  and  attractive  market  incentive  mechanisms  will  be  in  place  (UNDP 
2012). 

18.7  Energy services in the industrial sector 

“The main attractions for ESCOs are projects aimed to modernization of energy sources, 
co-generation  plants  in  large  industry.  The  first  ESCO  contract  followed  the  UK  Energy 
Management  Contract  model.  In  this,  the  ESCO  executes  a  turn-key  project,  including 
the  delivery,  installation  and  operation  of  a  combined  heat  and  power  (CHP)  plant  or 
other energy efficiency installation. The ESCO owns the installation during the timeframe 
of  the  project,  and  is  selling  the  service  (electricity  and  heat)  at  a  lower  price  than  the 
local  supplier,  but  when  the  project  ends,  the  installation  is  handed  over  to  the  client. 
This is also referred to as build-own-operate-transfer (BOOT) contract. The ESCO project 
is  financed  by  foreign  bank  loans  through  the  ESCO,  and  a  guarantee  by  local  banks.” 
(UN Economic Commission for Europe.2013) 

77 

 
18.8  Conclusions 

Some  significant  movements  towards  market  economy  and  economic  stabilization  have 
taken place recently, and along with improvements in legal framework, they make ESCO 
operation almost possible. A number of incentives are in place. Contracts are enforceable 
and rights of foreigners are well catered for. 

Economic indicators are moving in the right direction and inflation has fallen considerably 
although  still  high  by  western  standards.  Interest  rates  are  coming  down  and  there  are 
tax incentives available for investment in energy efficiency. Banks are willing to consider 
loans for energy efficiency but the loan terms are short and they continue to lend only on 
an asset based philosophy. 

“The days  of cheap gas from Russia are however coming to an end, and the higher gas 
prices will certainly be a key driving force for greater implementation of energy efficiency 
measures.  This  in  turn  will  help  the  ESCO  industry  to  get  established  and  mature  in 
Belarus.”  (Iqbal  et  al.2006).  The  goal  of  the  Government  is  to  further  reduce  the 
subsidies for energy to zero. The decision № 1180 of the Council of Ministers of Belarus 
dated August 9, 2010 "On Approval of the development strategy of the energy potential 
of the Republic of Belarus" calls for the phase out of all energy tariff subsidies, including 
those  for  natural  gas  used  for  food  preparation  by  2011,  for  electricity  by  2013  and  for 
district  heating  by  2014  thereby  increasing  the  heating  costs  to  the  population  and 
making the energy efficiency of buildings even more important. 

18.9   References 

- UN Economic Commission for Europe.2013 "Development of Energy Service Companies 
(ESCO)  Market  and  Polices  in  Selected  Countries  of  South  –Eastern  Europe,  Eastern 
Europe  and  Central  Asia  –Background  paper  –Steering  Committee  of  the  Energy 
Efficiency  21 
session  Geneva  17  April  2013 
Four 
http://www.unece.org/fileadmin/DAM/energy/se/pdfs/eneff/eneff_sc_24/ECE.Energy.WP
4.2013.4_e.pdf 

Programme  Twenty 

-  UNDP  2006.  UNDP  Project  document  for  the  Project  “Removing  Barriers  to  Energy 
Efficiency in the State Sector in Belarus” erc.undp.org/evaluation/evaluations/detail/5586 

-  UNDP  2012.  Project  Document  for  the  Project  “Improving  Energy  Efficiency  in 
Residential 
Belarus”  
http://www.by.undp.org/content/belarus/en/home/operations/projects/environment_and
_energy/project_sample.html 

Buildings 

Republic 

the 

of 

in 

-Iqbal, Anees, Denis Yozhikov. 2006 ‘‘Challenges for Setting Up ESCOs in Largely State-
Run  Economies  such  as  the  Newly  Independent  States  of  the  Former  Soviet  Union‘‘- 
Abstract  for  Panel  of  the  2006  ACEEE  Summer  Study  on  Energy  Efficiency  in  Buildings 
http://www.eceee.org/library/conference_proceedings/ACEEE_buildings/2006/Panel_8/p
8_11/paper 

Alexandre  Grebenkov,  Andrei  Molochka.  2013  –  Presentation  "Removing  Barriers  to 
Energy  Efficiency  Improvements  in  the  State  Sector  in  Belarus"  at  Fourth  International 
for  Sustainable  Development,  Tbilisi  Georgia  17-19.09.2013 
Forum:  Energy 
http://www.unece.org/fileadmin/DAM/energy/se/pp/eneff/IEEForum_Tbilisi_Sept13/Day_
2/ws3/p3/Molochko.pdf 

78 

 
 
 
19 Development of the ESCO Market in Russia in 2015 

19.1  General overview of the market  

Despite  the  economic  downturn  in  Russia,  the  energy  services  market  has  grown  with 
moderate  rate  and  few  positive  changes  regarding  better  promotion  of  energy  services 
can be pointed out since 2013 (EC, 2016): 

—  The  Russian  Association  of  Energy  service  companies  (RAESCO)  was  established  in 

2014.  

—  The standard titled “Measurement and verification of energy efficiency” was analyzed 
and  adopted  by  the  Members  of  the  RAESCO  Council.  This  standard  is  the  first 
standard  of  the  Russian  Federation  in  this  area  and  it  will  allow  to  assess  the 
indicators of energy efficiency and energy savings volumes during the implementation 
of specific projects and energy saving measures (EC, 2016). 

—  The  state  regulation  (29  orders)  on  energy  services  were  developed  and  adopted. 

Some laws were also changed and factoring was developed. 

The  Market  structure  was  changed.  A  number  of  companies  left  the  market  for  energy 
services,  and  new  companies  came.  The  Federal  Energy  Service  Company  (FESCO),  a 
public ESCO created in 2011, failed to become a functional Super ESCO (EC, 2016) . 

As of 2015 about 100 ESCOs were active in the Russian market for energy services (EC, 
2016). 

It  has  to  be  taken  into  account  that  most  ESCOs  do  not  take  universal  projects,  but 
rather prefer to work in certain fields of specialization: some ESCOs choose lighting and 
heating  systems,  others,  which  are  bank  subsidiaries,  specialize  in  funding  EE  projects 
and still others operate as dealers of certain kinds of equipment. Very few companies are 
capable of doing in-depth analysis and offer a whole spectrum of services, while funding 
all  relevant  activities  --  from  energy  saving  at  the  stage  of  generation  (regardless  of 
energy  resources)  to  creating  optimal  energy  consumption  systems  in  various 
environments (workshops, offices, parking lots) (Smolnikov 2015). 

Most of the ESCOs (85 %) are small private companies with credit lines up to 1-3 billion 
(11.6 - 34.8 million EUR) and the rest (15 %) are large private companies (EC, 2016). 

The  types  of  projects  implemented  by  ESCOs  are:  Public  Street  lighting,  residential 
buildings lighting, improvement of heating in buildings, improvement of district heating in 
public  utilities,  electric  motors  for  utility  and  industrial  sector,  refurbishment  of  public 
buildings. (EC, 2016) 

Energy  Performance  Contracts  (EPC)  with  shared  savings  have  been  used  for  the 
implementation  of  most  of  the  projects.  The  projects  are  financed  through  ESCOs’  own 
funds  since  the  private  client  are  reluctant  or  unable  to  commit  their  own  funds  for 
project  implementation.  Only  few  projects  have  been  financed  by  the  customers 
themselves. However, the term EnPC is also used for different types of contracts. Some 
of  these  contracts  cannot  be  considered  ‘real’  EnPCs.  In  these  cases  the  contractor 
(ESCO)  does  not  take  on  a  performance  obligation,  nor  provides  the  project  financing 
(EC, 2016). 

According  to  the  law  ESCOs  are  obliged  to  finance  the  projects  in  the  public  sector.  In 
contrast, Russian banks rarely provide direct loan financing for energy efficiency projects 
of ESCOs, but rather offer financial leasing contracts. 

19.2  Legal framework  

The ESCO model was formally introduced in the Russian Federation through the Federal 
Law  No.  261-FZ  "On  Energy  Savings  and  Energy  Efficiency  and  on  amendments  to 
certain acts of the Russian Federation" adopted on 23rd November 2009. This law allows 
the  public  organizations  to  enter  into  long-term  EnPC  contracts  and  set  out  energy 

79 

 
savings  targets  for  public  organizations  and  the  obligatory  introduction  of  energy 
certificates. 

The federal public procurement law No. 94 "On the Placement of Orders for the Supply of 
Goods, Execution of Works and the Provision of Services for State and Municipal Needs" 
adopted in July 2005 sets out the basic rules for the procurement of EnPCs in the public 
sector. A new federal procurement law No. 44 "On the Contract System in the Realm of 
the  Procurement  of  Goods,  Works  and  Services  for  the  Provision  of  State  and  Municipal 
Needs"  adopted  in  April  2013  took  effect  on  1st  January  2014  and  allows  a  two-stage 
procurement  process  for  EnPCs.  This  should  increase  the  chances  of  a  qualified  ESCO 
being selected. 

In November 2014 the Deputy Prime Minister of the Russian Federation approved the list 
of  tasks  on  improvement  of  legislation  in  the  field  of  energy  service  (29  tasks)  of  the 
federal  executive  bodies  on  improvement  of  normative  legal  acts.  To  date,  most  of  the 
orders were fulfilled or is in the process of execution (ex: the draft law on improvement 
of  housing  legislation  is  developed  and  submitted  to  the  Government).  There  are  some 
issues when utility services providers implement energy service contracts (EC, 2016). 

19.3  Barriers to the development of the energy service market: 

Although  in  the  last  two-three  years,  some  positive  changes  give  fresh  impetus  to  the 
ESCO market in Russia, there are still barriers for its faster development as (EC, 2016): 

—  Legal:  The  regulatory  framework  for  the  public  sector  could  benefit  from  further 
improvements  such  as  the  introduction  of  international  monitoring  and  verification 
protocols,  long-term  budgeting  for  certain  types  of  public  organizations  and  the 
possibility to include other savings besides energy cost savings (such as maintenance 
cost optimization) in the contract. 

—  Financial:  High interest  rate  on  loans  and  the low  cost  of  energy  resources  makes  a 
large  number  of  projects  unattractive  for  investors.  Financial  infrastructure  and 
special  banking  products  for  the  energy  service  is  still  being  formed.  Russian  banks 
are unfamiliar with the ESCO concept and thus reluctant to provide project finance to 
ESCOs while ESCOs have balance-sheet constraints to take on asset-backed loans. To 
date,  financial  support  for  the  sector  by  the  state  (for  example,  in  the  form  of 
subsidies for compensation of interest rates) is missing. 

—  Political  risks.  There  are  problems  with  payment  of  energy  service  contracts 

previously concluded after the change of heads of municipalities or regions. 

—  Many enterprise directors still believe that electricity costs are a fixed value, and fail 
to  understand  that  electricity  consumption  and,  hence,  the  costs  can  be  drastically 
reduced. 

—  Lack  of  understanding  and  confidence  in  the  ESCO  concept.  Industrial  clients  often 
prefer to undertake the projects themselves instead of outsourcing these to an ESCO. 
Many  public  clients  lack  the  expertise  and  resources  to  prepare  the  required  tender 
documentation and EnPC. 

—  High  project  transaction  costs.  Project  development  costs  are  still  relatively  high 
which  is  especially  an  issue  for  those  projects  that  are  tendered  under  public 
procurement rules. This means an ESCO has to make significant investments up front 
in preparing its proposal without knowing whether it will be granted the project. 

19.4  Recommendations to overcome the existing barriers 

According  to  the  experts  the  development  of  the  Russian  energy  service  market  can  be 
accelerated if the following will be taken in consideration: 

—  Strict  implementation  of  all  instructions  set  out  by  the  Deputy  Prime  Minister  can 

solve some of the legal barriers; 

80 

 
—  Creation  of  a  special  factoring  company  (with  the  participation  of  major  banks)  and 
introducing  of  special  credit  lines  from  the  Central  Bank  to  commercial  banks  at  a 
reduced interest rate on the loan or interest rate subsidies financed from the federal 
budget;  reduce  the  amount  of  redundancy  on  loans  to  implement  energy  service 
projects; 

—  Further  promotion  of  the  ESCOs  and  ESCO  concept  by  the  Russian  Association  of 
energy  service  companies  (RAESCO).  RAESCO  should  represent  ESCOs  in  the 
dialogue  with  the  authorities  (to  create  political  guarantees  of  compliance  with 
obligations); 

—  Capacity  building  activities  for  ESCOs,  energy  specialists  and  public  sector.  The 
educational  and  training  program  for  specialists  in  the  field  of  energy  saving  and 
energy efficiency has been approved during the meeting between RAESCO and public 
authorities. It will be used for training the staff of organizations that are members of 
the  RAESCO  and  for  experts  within  the  public  sector  (the  Analytical  Center  plans  to 
take  part  in  the  organization  of  this  training),  and  well  as  a  wide  range  of  people 
interested in improving their skills in the field of energy services. 

—  The  two-stage  procurement  procedure  introduced  on  1st  January  2014  may  partly 
help  in  addressing  the  issue  regarding  high  transaction  cost  for  preparation  of 
projects  as  ESCOs  will  not  have  to  undertake  a  full-scale  investment-grade  audit 
before  bidding.  Under  the  new  procedure,  this  audit  will  only  be  required  in  the 
second  stage  of  the  procurement  procedure  when  the  public  client  has  shortlisted  a 
small number of ESCOs. 

19.5  Energy services in the public sector 

The projects in the public sector typically focus on improvements in the heating system 
(e.g. through the installation of an individual heating point), energy-efficient lighting and 
low-cost measures such as the insulation of pipes. More capital-intensive measures such 
as  the  insulation  of  façades  are  usually  not  included  as  they  do  not  pay  back  in  a 
commercial time-frame given the existing tariffs and contract duration. (EC, 2016) 

Some  projects  in  street lighting  have  appeared in  Russian  medium-sized  regional  cities. 
Savings  under  these  types  of  projects  are  typically  in  the  range  of  30%  to  60%.  These 
projects  usually  focus  on  replacing  outdated  mercury  technology  for  High  Pressure 
Sodium  lighting,  as  well  as  dimming  of  lighting  outside  peak  hours.  LED  technology  is 
currently  not  being  used  widely  as  it  does  not  make  commercial  sense  under  an  EnPC 
(EC, 2016). 

Public utilities such as district heating companies and water utilities are not limited to just 
one model of shared savings of the EnPC by the public procurement legislation. They can 
tender  out  such  contracts  according  to  their  own  existing  procurement  rules.  However, 
an  important  issue  for  such  contracts  is  the  uncertainty  regarding  the  future  tariffs  the 
utilities may use as the tariffs are typically fixed for a relatively short period (EC, 2016) . 

As of 2015, 500 projects were implemented in public buildings and public street lighting 
with an investments volume of 1,5 billion rubles (14) (expected energy savings is about 1 
billion kW-hour) (EC, 2016). 

The  program  on  granting  subsidies  to  the  regions  was  terminated  and,  therefore,  the 
regions  are  facing  the  lack  of  financial  resources.  The  underfunding  of  the  public  sector 
prevents  them  to  implement  energy  saving  measures.  Therefore,  the  improvement  of 
energy  efficiency  rarely  occurs  for  refurbishment  or  reconstruction  of  buildings.  On  the 
other hand, this situation stimulates the development of the energy service market (EC, 
2016). 

14 1.5 billion ruble = 1,696,1234 EUR (1EUR=84.76RUB/exchange rate on 24.02.2016) 

81 

 
                                           
19.6  Energy services in the residential sector 

There  are  objective  problems  with  the  efficiency  of  housing  management.  Management 
companies can vary each year, making them undesirable for the company energy service 
company.  The  conclusion  of  energy  service  contracts  directly  with  the  owners  requires 
compliance with a complex set of formalized procedures (however, this process today is 
becoming more mature). Today, there is an extra fee on homeowners for major  repairs 
of  apartment  houses.  Credit  mechanisms  for  improving  energy  efficiency  of  apartment 
buildings are missing. Systematic work on energy efficiency depends on income and the 
collection of payments for energy resources. To date, legislation on the indication of the 
energy efficiency class of apartment buildings is not completed (EC, 2016). 

19.7  Energy services in the industrial sector 

Russian  market  is  huge  and  all  industrial  sectors  --  carmakers,  steel  mills,  pulp  and 
paper, glass industry, machine building -- need to increase their energy efficiency.  

Few  ESCOs  are  currently  active  in  the  industrial  sector.  Since  2014  in  the  industrial 
sector  about  20  ESCO  projects  with  an  investment  volume  of  EUR  40-50  million  have 
been implemented (EC, 2016). 

Electricity  is  one  of  the  major  causes  of  expenditure  in  industrial  enterprise.  Optimizing 
electricity consumption will help fulfill the main task of achieving a substantial reduction 
of  overall  costs  and  increasing  the  product’s  competitiveness.  ESCOs  work  to  achieve  a 
reduction of all customer’s energy and utility related costs, including: (Smolnikov 2015) 

•  costs  of  generation  and  distribution  of  energy  and  utilities,  including  compressor 
stations, water treatment systems, boilers, cooling towers, internal distribution networks; 
• costs associated with work areas, including lighting, air conditioning, heating and heat 
insulation; 

•  costs  of  feedstock  and  costs  associated  with  operations  of  efficiency  monitoring  and 
promotion of lean production. 

In  the  industrial  sector  there  are  not  significant  legal  barriers  to  implement  energy 
efficiency. However, due to financial barriers and lack of motivation for energy efficiency 
(including  the  lack  of  administrative  incentives,  tasks  by  increasing  energy  efficiency, 
etc.)  such  projects  are  not  a  priority  for  the  industry  sector  (EC,  2016).  Common 
approaches to increase energy efficiency are running austere projects with short payback 
periods, which the enterprise is able to implement with its own available resources. As a 
consequence, such projects cannot have any impressive results (Smolnikov 2015). 

Some  complex  projects  on  energy  efficiency  are  economically impossible  and  practically 
not feasible because of the significant cost of imported equipment (due to the economic 
downturn in Russia) and the absence of domestic analogues (EC, 2016). 

Furthermore,  the  issue  of  the  predictability  of  energy  consumption  is  a  clear  risk  for 
ESCOs  as  the  energy  consumption  is  linked  to  production  levels  which  may  vary 
significantly over the contract duration (EC, 2016). 

There  are  many  companies  that  offer  services  for  the  implementation  of  energy 
management  systems.  These  systems  are  implemented  in  some  industrial  enterprises 
(including at the direction of the parent holdings). These organizations typically integrate 
with  each  other  and  have  certified  the  quality  management  system  (ISO  9001), 
environmental  management  (ISO  14001),  occupational  health  and  safety  (OHSAS 
18001) (EC, 2016). 

19.8  Conclusions 

The  government  program  of  energy  saving  and  energy  efficiency  calls  for  achieving  a 
40% reduction in the GDP energy intensity by 2020. According to assessments made by 
experts, the target is achievable as far as producing industries are concerned. Therefore, 

82 

 
the Russian market is a very attractive market for EE projects. In Russia there are many 
industrial  enterprises  built  in  the  second  half  of  the  20th  century,  which  are  running 
outdated energy equipment. The equipment has been operating for 30-40 and even more 
years  and  is  much  inferior  to  the  modern  and  innovative  models  in  terms  of  EE 
performance. 

Tax  incentives  will  definitely  catalyze  the  development  of  energy  service  business  in 
Russia.  Institutional  stability  and  predictability  is  important  in  order  to  avoid  errors  in 
project calculations. 

Finally,  it  is  important  for  ESCOs  to  establish  partnership  relations  with  equipment 
manufacturers and vendors for the sake of integrity and price reduction and, eventually, 
for achieving a breakthrough in the competitiveness of the Russian economy. 

19.9  References 

Smolnikov, Ivan. 2015. Article in “Energy and Industry in Russia” published in April 2015 
http://www.eprussia.ru/epr/649496/650495.htm 

Contacted Experts - Survey respondents: 

Tulikov Alexey, Russian Energy Agency 

83 

 
 
 
 
 
 
List of figures 

Figure 1. Process for establishing an Energy Efficiency Fund ......................................16 

84 

 
 
List of tables 

Table 1. Developmental level of the ESCO markets as of 2015 and the change in level of 
development between 2013 and 2015 ...................................................................... 6 

Table 2. The number of Covenant of Mayors signatories, and submitted and accepted 
SEAPs as of October2018 ......................................................................................14 

85 

 
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doi:10.2760/36626 

ISBN 978-92-79-64960-8