Mongolia targets ESCOs to achieve SDGs
- By Dulguun Bayarsaikhan -
- Dec 03,2018
To achieve its commitments to improve energy efficiency by 20 percent within the country’s Sustainable Development framework, Mongolia is focusing on reducing the energy consumption of 135 designated entities by increasing their energy efficiency through energy service companies (ESCOs). Recently, a three-day workshop on ESCOs was organized by The Deutsche Gesellschaftfur Internationale Zusammenarbeit GmbH (GIZ) and Energy Conservation Department (ECD) of the Energy Regulatory Commission (ERC) exploring opportunities and required cooperation to establish ESCOs in Mongolia.
Head of ECD Ts.Atarjargal announced at the workshop that Mongolia is learning from Latvia’s case and other ESCOs to use the Energy Performance Contract (EPC) financing system in implementing the National Energy Efficiency Action Program 2017-2020.
According to trainer of the workshop Eric Berman, simply put, ESCO is a concept in which engineering companies that previously rented out their service and certain gear or product started selling their performance instead. Berman is the founder of Renesco, the first renovation and energy service company, with an emphasis on renovation and retro-fitting as a housing solution for low and middle income households.
“The energy component is actually the way to pay for the renovation,” he said. The ESCO solves its financing through what’s called an EPC. The EPC is a simple arrangement where usually an ESCO represents the clients and takes their technical responsibility to deliver energy efficiency, and use the income from the cost savings to pay for the bank loan. “It requires transparency and clarity, and makes it easier to quantify the benefits to finance these very long-term renovation contracts,” said Berman.
The EPC is not a new concept.
“[EPC was common] mainly on the manufacturing, supply side, as [humans] produced a lot but also spent a lot of energy doing that. So someone 30, 40 years ago said, ‘Hey, you can improve your energy consumption by this much, and we’ll help you do that.’ So it refers to improving the energy consumption of any type of production. It could be energy itself, anything. On the demand side, it’s a bit less common. In America, they use it in their public sector, for authorities to not just reduce energy consumption, but very much for the maintenance of their properties. It creates clarity for the owner, to unburden them of the issues of how to maintain the building, as the building owner is not necessarily an engineer, so we have to outsource that,” Berman said.
Renesco was established in Latvia, a post-Soviet country similar to Mongolia in terms of housing. Their business model runs somewhat like this: Let’s imagine that an apartment’s Home Owner’s Association (HOA) paid for 400 MWh electricity to the House Maintenance Company (HMC). The HOA and the whole apartments shall agree on a demand for renovation. After the HOA signs a preliminary EPC with the ESCO, the ESCO uses its own funds to pay for the energy auditing and technical scoping. This project development process takes about six to eight months. Afterwards, the actual EPC of 20 years is signed and financed by a bank. They sign a contract with the construction company to perform the renovation, which takes place for three to nine months. The renovation promises an average indoor temperature of 21 degrees Celsius, 55 percent of improved energy efficiency, enhanced comfort, appearance and overall livability, which increases the overall price of the apartment should the owner decide to rent or sell. The housing commission will then accept the renovated building. Now, the renovated building will be saving 220 MWh electricity, but the client will be paying 400 MWh still. The HMC will allocate the 180 MWh electricity payment to the heat provider, and the 220 MWh electricity payment will be going to the ESCO, which will in turn pay back the construction company, banks, investors, and other logistics. Way before the 20 years, the bank loans will be repaid, investors will be getting profit, the apartment maintenance will be conducted based on need by the construction company, and 20 years later, the EPC is finished. To quote Berman, “It’s a win-win situation. So the question is, why are you not doing it already?”
Mongolia is committed to increasing its energy efficiency by 20 percent within 2030. “By the term improving energy efficiency, we include improving efficiency in all stages, including production, transfer, distribution, and client,” said Ts.Atarjargal.
He sees ESCOs as an opportunity to supply the increase in energy consumption with low investment spending, as saving 1MW electricity is equal to building an energy source for 1 MW.
Mongolians are planning to use the EPC, initially to finance for the energy efficiency improvement for 135 designated entities. According to the Energy Conservation Law, designated entities are those whose consumption of heat and/or electricity exceeded the threshold set by the government for conservation potential. They are now responsible for their buildings’ energy efficiency and the ERC is responsible for identifying these entities, monitoring their efforts to perform energy audits, and report their achieved energy savings. The head of ECD of ERC Atarjargal said that improving energy efficiency even by 15 percent in the 135 designated entities can prevent 678,600 tons of carbon dioxide emissions and save 685.5 million kWh energy, which is equivalent to the energy consumption of 228,000 families (59 percent of UB families as of 2017) and double the annual energy production of Darkhan power plant. The client will save approximately 90 billion MNT from energy savings. This is because although factories and entities only make up 7.5 percent of the energy users, they use 72.1 percent of total energy produced, or 3,464 million kWh of electricity. Of the 3,464 million, 1,988 or 57 percent is used by 135 entities.
“Where there is abundance of usage, there’s an abundance of opportunity for energy savings,” says Ts.Atarjargal.
These entities are now legally entitled to create a fixed job position within their companies for energy manager, have their energy manager trained, install metering system, send their energy report of the last three years within six months to the ERC, have energy auditing conducted within 18 months of notice and after that, once every three years, and send to the ERC an energy conservation plan, monitor accordingly and report on the results.
Within 2022, designated entities have to achieve a 10 percent energy efficiency, compared to that of 2016. To do so, Mongolia faces two issues, according to Ts.Atarjargal.
“One, technical consultancy and implementation, and two, financial. To solve both these issues, we’re implementing the ESCO mechanism, which is creating savings with financing from a third party with the least possible strain/ burden on the home owner. We are working on this in the end of 2018 and by 2019, we see that ESCO mechanisms will be able to start 100 percent,” he said.
From an energy auditing of 15 entities conducted by PwC, through a memorandum signed with ERC and GGGI, it was proven that there was a lot of room for improvement for designated entities. For instance, 44.28 percent of energy savings (from consumption) could be achieved at State Hospital No. 3, 41.51 percent at Makh Impex LC, and 20.82 percent at Mongolian National Broadcaster.
The ERC’s next focus is to decrease heat loss and improve energy efficiency of state buildings run by the state budget.
“As it is paid for by the taxpayers, they have to work efficiently. We studied possibilities by renovating and testing their energy efficiency,” said the head of ECD. In Khovd and Zavkhan provinces, 16 schools, kindergartens, and hospitals were renovated. They previously used 7.75 million kWh per year, and after renovation, they used 2.98 million kWh per year. This is a 61 percent savings.
“As the buildings are completely dependent on the state budget, we have to use the ESCO mechanism. But we have to work in close coordination with the policy of Ministry of Finance and the Law on State Budget,” he said.
Although the benefits won’t be achieved in the near future, the financial burden from housing will be lifted extensively in the long run. According to Ts.Atarjargal, Mongolia has 640 schools paying 173 billion MNT annually for energy alone.
“Let’s imagine the most minimal energy efficiency increase of 10 percent, we change its doors and windows, then we’re talking about a 17 billion MNT issue. How many schools can we build with 17 billion MNT? For insulation, we’ll maybe spend 600 million, one billion MNT, whatever. This is still trivial compared to the improved environment, air quality, and overall comfort for children. This will also mean that we’ll burn less coal, which ultimately improves air quality. Most of these buildings were also built around the 70s and 80s. So by renovating, we also add 20 years to their longevity,” he said.
To implement every new concept, there’s always a need for extensive capacity building, to equip individuals and existing companies with legal, technical, and financial tools and knowledge.
In Mongolia, 95 energy managers, 85 auditors, eight audit companies, and an ESCO are being trained. As for the policy and legal environment, a regulation was passed on giving permission to energy audit and ESCOs and the ERC said it will create ESCOs by policy, by enabling existing companies.
For the creation of an ESCO, capacity building trainings and workshops are being organized in partnership with various international partners and organizations. According to Ts.Atarjargal, the best examples of ESCOs are in China. The ERC visited China and signed a memorandum for Chinese ESCOs to work with Mongolian ESCOs for capacity building.
“We are developing various models, by learning from Chinese and European ESCOs, and creating our own domestic business model, financing system, and EPCs so that it can fit and work well in Mongolia. Firstly, capacity building for them, so that they start bearing a positive connotation. The number will also be capped and regulated by the ERC,” expressed Ts.Atarjargal.
These actions are one of many steps being taken by the ERC, in partnership with ministries, and international organizations such as GGGI and GIZ, in accordance with the Energy Conservation Law and National Energy Efficiency Action Program 2017-2020. This action plan contains in itself multiple innovative if implemented concepts, namely a tax reward system, energy efficient product labelling, and thirdly, improving the energy efficiency of 135 entities.
If all goes well, we could move on to better housing and renovating of Soviet-era buildings, to facilitate low and middle income households. Berman noted that it’s not only just achieving energy efficiency, it is improving the livelihood of many.
“The rationale to do something about the buildings is not just the energy saving potential, which is substantial, with carbon dioxide reductions, and all. But simply, it’s for the preservation of these buildings, the comfort and value of these buildings and making them a safe good home for the next four, five generations. You need them because you have a great shortage of square meters. You need them.”
Berman notes low electricity price as a challenge to building an ESCO system in Mongolia.
“In Latvia, energy savings are substantial as our tariff is decent. It’s the lowest in Europe, but it’s decent. It pays for almost all of our costs and enables additional costs for some maintenance and services that are agreed with the owners of the building. In Mongolia, you have a symbolic price of heating. There is no such possibility. Either the heating tariffs have to go up substantially, or there would have to be a whole different source of revenue. Because although there’s a lot of energy you can save, the energy savings won’t be worth much here,” stressed Berman.
“It’s also crazy, considering Latvia is relatively cold. Mongolia is twice as cold, exceptionally cold. If we use the parameter called degree days, which is the measurement of cold over the period that you’re heating, it is almost double. And your energy consumption therefore is twice that. Considering that they’re so poorly built, it’s very hard to understand that in such a cold country, you could have such incredibly poorly built buildings with such low energy values. This would be unacceptable in the Netherlands, where I originally come from. If you wanted people to be rational with resources, price them. And if you don’t price them, people don’t care. That’s the policy that Mongolia seems to have had for such a long time. It stems from the Soviet era, that there are no meters even. I was flabbergasted when I first visited Eastern Europe. But to have a large capital like Ulaanbaatar, not measuring the heat that goes into the building, to me, is really strange,” he said.
In order to implement ESCOs, there are various challenges.
“For any type of business and contract, which goes on for 20 years, you need trust. You need a lot of trust. Pricing, we mentioned, and stability. There are three things you need for an ESCO: First, heating tariff, you need a price, which should be transparent and not manipulated, so that financiers and ESCOs understand what’s happening to the pricing. The second is, you need a reasonable price of capital. If capital is very expensive, if the political situation is very unstable, banks feel insecure. That means capital is priced very high, meaning high interest rates. The expensive capital will have a direct impact on the affordability of the investment and saving energy. On the long term contract, one percent interest rate is equivalent to 10 percent increase or decrease in investment cost. It’s huge. Thirdly, this might be the most important thing, is the rule of law. These are investments based on contract, a piece of paper. You have to know for sure that this contract is unbreakable. That if you say you’re going to do it like that for 20 years, that it will hold up in court. That nobody can just challenge it or get away with not living up to it and just walk away from it. Because, with the investments that we have, we cannot walk away from it. The ESCO has that money sunk, you cannot undo a renovation. I believe that’s what I heard are major issues. I’ve talked to banks here, and they do not believe, at least at first sight now, that these contracts will hold up.
Although in Latvia, we had the same issue. They didn’t believe it. We had to convince them and talk with them a long time for them to see, but now, after eight, nine years, they agree, ‘Oh, these contracts are actually holding up quite well.’ They might hold up a lot nicer than banks think, although the political environment can be ever changing, which is challenging. But whatever government is here today, we’ll still be here. So, I have a bit mixed feelings about this, how good such a contract will hold up in Mongolia. But there will be distrust from the institutions here. You’d have to prove it to them,” Berman said.
Implementing the ESCO mechanismis beneficial to both the people and the environment. It helps cope with exponential population growth and lifts related financial risks for the country. However, with the political instability and financial incentives from government officials, one could only hope that ESCOs come to reality, create a better environment for the children, and in the future, contribute to creating viable housing solutions for low and middle-income households.