Report No: AUS0000388 . Bulgaria National Program for Energy Efficiency in Residential Buildings Program Design Report for the Second Phase . July 2018 . Energy and Extractives Global Practice Group Europe and Central Asia Region (ECA) . Document of the World Bank © 2018 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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CONTENTS ACKNOWLEDGEMENTS ...................................................................................................................... iii ACRONYMS .............................................................................................................................................. iv SECTION 1 – INTRODUCTION.............................................................................................................. 1 SECTION 2 – RESULTS AND LESSONS FROM PHASE 1 ................................................................ 6 Barriers to Residential Energy Efficiency................................................................................................. 6 National Program for Energy Efficiency in MABs................................................................................... 7 Program Results ........................................................................................................................................ 9 Analysis of Phase 1 ................................................................................................................................. 10 Lessons Learned...................................................................................................................................... 12 SECTION 3 – ELEMENTS OF A LONG-TERM PROGRAM ........................................................... 14 Introduction ............................................................................................................................................. 14 Program Objective .................................................................................................................................. 14 Program Eligibility.................................................................................................................................. 14 Funding Levels........................................................................................................................................ 15 Need for a Multi-Phase Set-Up ........................................................................................................... 15 Renovation Costs ................................................................................................................................ 16 Subsidy Levels .................................................................................................................................... 17 Long-term Program Oversight and Technical Assistance....................................................................... 18 Long-Term Program Performance Indicators ......................................................................................... 21 SECTION 4 – KEY DESIGN OPTIONS FOR PHASE 2 ..................................................................... 23 Institutional Setup ................................................................................................................................... 23 Financing Options ................................................................................................................................... 26 Overview of Financial Products .......................................................................................................... 26 Potential Borrowers and Repayers ...................................................................................................... 27 Repayment Sources ............................................................................................................................. 28 Financing and Repayment Options ..................................................................................................... 29 Conclusion on Financing and Repayment Scheme ............................................................................. 30 SECTION 5 - RECOMMENDED DESIGN FOR PHASE 2 ................................................................ 31 Institutional Set-up .................................................................................................................................. 31 Program Eligibility Criteria and Procedures ........................................................................................... 32 Eligibility of Program Expenditure ......................................................................................................... 35 Program Cost and Subsidy ...................................................................................................................... 38 Linking Phase 2 Design to Barriers and Phase 1 Lessons ...................................................................... 39 Risks ........................................................................................................................................................ 40 Annex 1. Data Analyses from Phase 1 ..................................................................................................... 42 i Building Data from the SEDA Database of Energy Audits from Phase 1 of the Program ..................... 42 Building Data from the BDB Database of Contractor Invoices from Phase 1 of the Program ............... 46 Annex 2. Regional Experiences of Thermo-Modernization Programs for Multiapartment Buildings .................................................................................................................................................................... 50 Financial Mechanisms............................................................................................................................. 50 Example 1: Multi-Apartment Thermo-Modernization Model in Lithuania ........................................ 50 Example 2: Thermo-modernization Fund in Poland ........................................................................... 51 Example 3: Delivery Mechanism in the Slovak Republic — State Housing Development Fund ...... 53 Example 4: Reconstruction Grant and Financial Instruments – Estonia............................................. 54 Example 5: Promotion of Energy Efficiency investment in residential sector – Russia..................... 56 Lessons Learned...................................................................................................................................... 57 Annex 3. Sample Documents .................................................................................................................... 59 Energy Audit and Investment Plan ......................................................................................................... 60 Sample documents dealing with HOA meeting organization and decision making to implement thermo- modernization project ............................................................................................................................. 69 Invitation to the meeting of owners of apartments and other premises, to discuss the implementation of energy efficiency measures proposed by the Energy Audit and Investment Plan (EA/ IP) ........... 69 List of Participants .............................................................................................................................. 70 Meeting Minutes (Draft) ..................................................................................................................... 71 Sample outreach materials developed in other countries ........................................................................ 75 Annex 4. Details of Phase 1 of the Program............................................................................................ 76 Eligibility of the candidates .................................................................................................................... 76 Energy efficiency requirements .............................................................................................................. 76 Stakeholders and Their Functions ........................................................................................................... 77 Investment costs and energy savings ...................................................................................................... 79 Annex 5. Comparison Analysis of Potential Candidates for Holding Fund for Phase 2 .................... 82 ii ACKNOWLEDGEMENTS This report presents the proposed design for the second phase of the Government of Bulgaria’s National Program for Energy Efficiency of Multifamily Buildings, which was funded by the World Bank’s Europe and Central Asia Region. The team was led by Jas Singh (Lead Energy Specialist and Task Team Leader) and included Viktoras Sirvydis (Senior Energy Efficiency Housing Specialist, Consultant), Yanqin Song (Senior Energy Specialist), Eolina Milova (Senior Environmental Specialist), Kamen Simeon (Energy Efficiency Specialist, Consultant) and Tigran Parvanyan (Energy Specialist). The team would like to acknowledge contributions and valuable feedback provided by Ashok Sarkar, Xiaodong Wang, Feng Liu, Martina Bosi, Sameer Shukla and Tony Thompson. The team also greatly acknowledges the close cooperation and support from the Ministry of Regional Development and Public Works (MRDPW), including Ms. Malina Kroumova and Mr. Fyodor Salmov. A roundtable discussion was held on April 13, 2018, at MRDPW to discuss the main design parameters and solicit feedback that has since been incorporated into this final report. The participants included representatives from the Ministry of Finance, the Ministry of Energy, the National Association of Municipalities in the Republic of Bulgaria (NAMRB), EcoEnergy (the Bulgarian Municipal Energy Efficiency Network), the Center for Energy Efficiency (EnEffect), and the Sustainable Energy Development Agency. iii ACRONYMS BDB Bulgarian Development Bank BGN Bulgarian lev (currency code) BoQ bill of quantities COMA Condominium Ownership Management Act CO2e carbon dioxide equivalent DB database DH district heating EBRD European Bank for Reconstruction and Development EC European Commission ECA Europe and Central Asia region EE Energy efficiency EEO Energy Efficiency Obligations EERSF Energy Efficiency and Renewable Sources Fund EPC energy performance certificate ERDF European Regional Development Fund ESCO energy service company ESM energy saving measure EU European Union EU-MS European Union – Member State EU SF European Union Structural Funds FI financial intermediary GA General Assembly GDP gross domestic product GHG greenhouse gas HESA Housing Energy Saving Agency (Lithuania) HF holding fund HH household HOA homeowners’ association IFI international financing institution II implementing intermediary IT information technology JESSICA Joint European Support for Sustainable Investment in City Areas kgoe kilogram(s) of oil equivalent KIDSF Kozloduy International Decommissioning Support Fund M&E monitoring and evaluation MAB multifamily apartment building MCC multicast concrete building MOE Ministry of Energy MOF Ministry of Finance MRDPW Ministry of Regional Development and Public Works Mtoe million tonnes (i.e., metric tons) of energy equivalent MW megawatt NAMRB National Association of Municipalities NEEAP National Energy Efficiency Action Plan NZEB nearly zero-energy buildings PCU Program Coordination Unit PIU program implementation unit PPA Public Procurement Agency iv PSC Program Steering Committee RE renewable energy RES renewable energy source SBA State Budget Act SEDA Sustainable Energy Development Agency TA technical assistance UNDP United National Development Programme VAT value-added tax v SECTION 1 – INTRODUCTION Bulgaria faces the challenge of reducing its high energy and carbon intensity levels to comply with European Union (EU) reduction targets. It is the most energy-intensive economy in the EU, with 610 kilograms of oil equivalent (kgoe) per €1,000 of gross domestic product (GDP) – about 4.3 times higher than the EU as a whole. Its greenhouse gas (GHG) emission intensity (0.36 kg of CO2 per unit of GDP PPP) is twice the EU average (0.18) due to a highly carbon-intensive energy mix: coal accounts for about 38 percent of total primary energy supply. To address these challenges, the government of Bulgaria has made energy efficiency (EE) a cornerstone of its energy policy. In line with the EU’s climate and energy package (“20/20/20 by 2020â€?),1 Bulgaria’s third National Energy Efficiency Action Plan (NEEAP) 2014-2020 set two specific targets for 2020: (a) increasing energy savings by 25 percent – i.e., 1.6 million metric tons of energy equivalent (Mtoe) in primary energy savings – and (b) reducing energy intensity by 41 percent compared to 2005 levels. As an EU member state, Bulgaria has aligned its legal and regulatory framework with relevant EU directives and established a suitable institutional framework to support the implementation of its energy efficiency policy. Legislation governing the energy efficiency of buildings, initially introduced in 2005, was amended in 2009 and 2013 to include more-stringent standards. A new Energy Efficiency Law was introduced in May 2015 in line with the EU’s Energy Buildings Performance Directive (2010/31/EU) and Energy Efficiency Directive (2012/27/EU). The Law introduced and further defined energy savings obligations for energy suppliers, mandatory compliance of new and renovated buildings with energy efficiency standards, energy performance certificates, and mandatory energy efficiency audits for public buildings whose floor area is over 250 m2). Bulgaria further adopted the EU’s Energy Performance of Buildings Directive (2010 recast) in 2013. The Ministry of Energy (MOE) is responsible for the overall coordination, implementation, and monitoring. The Sustainable Energy Development Agency (SEDA), under the MOE, is delegated with the monitoring and the execution of the measures set out in the NEEAP. The Ministry of Regional Development and Public Works (MRDPW) is responsible for the implementation of energy efficiency programs in the buildings sector. Significant reductions in Bulgaria’s energy intensity have already been achieved since the early 1990s due to structural shifts in the economy away from energy-intensive industries. With 306 million square meters of building floor area, the buildings sector accounts for over a third of the total final energy use. The residential building stock accounts for the largest share, with about 71 percent of energy use in the buildings sector, and most of energy consumption in buildings is for space heating. Only about 18 percent of residents are served by district heating (DH). The rest generate heat from electric heating (almost 40 percent), building-level boilers (coal, fuel oil, gas, wood pellets) and individual stoves. Bulgaria’s residential housing stock includes over 500,000 inhabited buildings, which include about 3.35 million dwellings.2 There are about 65,000 pre-1990 residential multifamily apartment buildings (MABs) made of cement and bricks, monolithic concrete construction, and prefabricated 1 The EU’s “climate and energy packageâ€? of legislation, which became EU law in 2009, refers to a 20 percent cut in greenhouse gas emissions (from 1990 levels), 20 percent of EU energy from renewables, and a 20 percent improvement in energy efficiency. See https://ec.europa.eu/clima/policies/strategies/2020_en. 2 National Statistical Institute (NSI), 2011 Census. 1 panel blocks (Figures 1 and 2). Due to the absence of energy efficiency norms in the building codes of the time, most of these buildings have little or no thermal insulation in their building envelopes. As a result, their energy consumption is at least twice as high as those built to current standards. Further, many buildings are severely underheated, with data from energy audits showing that typical MABs are heated to only about 13-16° C, well below the 20-21° C national standard. A recent World Bank report 3 covering Bulgaria, Croatia, Poland and Romania estimated the expected economic benefit from improved indoor heating at about 40 percent of the energy cost savings, which is very conservative. Figure 1. Residential Building Stock, by Type and Decade (number of units) 450,000 400,000 Panel 350,000 300,000 Brick with concrete 250,000 slabs 200,000 MCC 150,000 100,000 Other 50,000 - Figure 2. Composition of the Residential Building Stock in Bulgaria (% based on floor area) 3World Bank, Scaling up Thermal Retrofit of Residential and Public Buildings in Eastern Europe (Washington, D.C.: World Bank), March 2018. 2 The MABs are also in very poor condition and structurally unsound due to chronic lack of maintenance. This refers to building envelopes (leaking roofs, damaged facades with fallen plaster) as well as to the common areas and the infrastructure within the buildings (electric wiring, water and sewerage, etc.). Since the multifamily buildings were built, there have been no plans for maintaining and eventually replacing the common areas and infrastructure (e.g., roof, exterior walls, stairwells and elevators, hallways, heating systems). While homeowner associations (HOAs) were supposed to help address these systemic issues, differences in income levels among residents, skepticism about whether others would pay, cultural biases against collectivism, and a general dissatisfaction about the buildings’ conditions and service levels have impeded establishment and proper functioning of HOAs. Moreover, while the Condominium Ownership Management Act is designed to regulate the management of buildings, the obligations under the law do not appear to be enforced, so that deterioration continues. In recent years, this situation has been exacerbated by high apartment vacancy rates, concerns over housing affordability, and very low household mobility. Further, buildings in Bulgaria have high exposure to seismic activity with most buildings constructed prior to the introduction and enforcement of modern seismic codes4. In addition, anecdotal evidence suggests the older, poorly maintained buildings may not have maintained their structural integrity after so many decades without critical refurbishment.5,6 To address the need for MAB renovation, since 2007 the MRDPW has implemented several energy efficiency programs funded by international financial institutions (IFIs), donors and EU structural funds (see Box 1). However, so far, these programs have not been implemented on a large scale and have faced difficulties tapping into private funding. Increasing levels of capital grant support have been needed to kick-start programs in MABs (up to 85 percent) – but despite this level of grant financing, demand has been low and very few MABs have been renovated. There have also been more commercially oriented initiatives—mainly credit lines channeled through local commercial banks, which have built the capacity of financial intermediaries with regard to energy efficiency lending. However, the individual loans are typically small (an average of €1,550) and fund individual energy efficiency measures, such as window replacements, rather than comprehensive thermal retrofits. Box 1. The Evolution of Bulgaria’s Residential Retrofit Program The Demonstration Project for the Renovation of Multi-family Buildings was implemented by MRDPW with support from UNDP. Under this program, which started in 2007, about 54 multi-family buildings were renovated. The project demonstrated that energy savings of over 40 percent, along with substantial reductions in CO2 emissions, are possible. The Energy Efficiency Credit Line for Households was set up in 2005 as a collaborative initiative between the Bulgarian government, the European Bank for Reconstruction and Development (EBRD) and the Kozloduy International Decommissioning Support Fund (KIDSF) to provide households and HOAs with credit lines for EE and renewable energy sources (RES) projects. Working with four local banks, the fund consisted of an EBRD loan of €90 million and €24.6 million in grant money from KIDSF. The grant funding provided up to 35 percent of the total loan. The credit line, which expired at the end of July 2014, disbursed appro ximately €62 million in loans and €11.3 million in grants while supporting over 40 thousand projects. Most of these loans were for individual dwelling measures, with an average sub-loan size of €1,550; only 100 loans for whole -building refurbishments were made available under the credit line. 4 In 2011, Bulgaria adopted the Eurocodes as the official standard for structural design. Previous building codes were based on different understanding of seismic hazard and the performance of buildings to earthquake shaking. 5 World Bank, Bulgaria Housing Sector Assessment Final Report (Washington, D.C.: World Bank), June 2017. 6 An ongoing collaboration between MRDPW and the World Bank is investigating seismic risk in pre-cast panel buildings and options for structural strengthening with results expected in late 2018. 3 The Energy Renovation of Bulgarian Homes project was launched in July 2012 with the financial support of “Regional Development 2007–2013,â€? a €50 million program co-financed by the EU through the European Regional Development Fund. The project extended to 36 urban centers and was implemented through 2015. Eligible residential buildings (that is, six or more detached individual units and three or more floors) that are registered HOAs received up to 75 percent of renovation costs as a grant. Despite the high levels of capital grant support, demand by HOAs to participate in the program was very low. From 2007 to 2011, 50 multi-family buildings (representing 1,093 households and just under 81,000 m2) were retrofitted. A similar BGN 10 million (about €5.1 million) scheme supports retrofits in social housing for vulnerable minority and disadvantaged groups through 100 percent grant financing. National Program for Energy Efficiency in MABs In February 2015, MRDPW launched the National Program for Energy Efficiency of Multifamily Buildings to support the rehabilitation of MABs through the implementation of energy efficiency measures and structural renovations. The Program’s objectives were to (a) improve the energy efficiency of multifamily residential buildings and reduce energy expenditures, (b) extend the life- time of buildings, and (c) contribute to a reduction in local and global air pollution. The initial budget of the Program in 2015 was BGN 1 billion (€500 million), and in 2017 it had expanded with an additional BGN 1 billion. The Program offered 100 percent grant support to registered HOAs in Bulgaria that were built prior to 1990. The Program was open to all older buildings – first only prefabricated panel buildings were included but the Program was expanded in 2016 to include brick and monolithic concrete built before 1999 – with instructions to municipalities to prioritize the most dilapidated ones. Under the framework developed by MRDPW, the Bulgarian Development Bank (BDB) acted as a paying agent and accepted applications from HOAs through the municipalities. Municipalities undertook all procurement and oversight and submitted approved invoices for payment by BDB. Since its launch, the Program has allocated almost all of its BGN 2 billion budget to renovate 2,022 buildings and correspond to Class C (EU energy performance level for buildings) or better. About 5,300 applications were received by the BDB, of which 2,022 financing contracts were signed. Of those approved, about half of the projects have already been completed and the rest are under implementation. The Program has achieved substantial results in demonstrating the benefits of housing renovations for energy efficiency and in improving the enabling environment for the implementation of energy efficiency investments in Bulgaria’s residential sector (e.g., conducting energy audits, preparing technical designs, building capacity in the construction sector, monitoring energy savings, issuing residential building certificates). It also helped demonstrate that HOAs can become a useful vehicle to improve and maintain the conditions of MABs. Residents experienced increases in indoor comfort levels, reduced energy bills, and a substantial increase in satisfaction with their buildings. With the completion of the initial phase of the Program, the government is now ready to develop a longer-term vision for the renovation of the full building stock and the design of the second phase which would seek to develop more sustainable and scalable financing mechanisms and build on the lessons learned from Phase 1. Section 2 includes a brief summary of the results from the first phase along with lessons learned. Section 3 outlines a longer-term strategic approach to supporting the renovation of the remaining residential building stock in Bulgaria and proposes a detailed program plan for the second phase. The outline was developed to help the government communicate its plans to renovate the full building stock over the next 20-30 years while managing expectations about future levels of government support. Sections 4 and 5 then analyze and recommend specific design options for the 4 second phase of the Program which seek to introduce some level of HOA co-financing and address some of the implementation challenges and lessons noted in the first phase. 5 SECTION 2 – RESULTS AND LESSONS FROM PHASE 1 Barriers to Residential Energy Efficiency Tackling the residential sector has been a challenge across Eastern Europe due to the underdeveloped markets, aging building stock and lack of functioning HOAs. As a result, investment subsidies have been ubiquitous for housing renovation and energy efficiency programs in such countries as Lithuania, Poland, Slovakia and Estonia (see Annex 2 for case studies on these programs). The experience of Bulgaria has been no different, and thermal refurbishment efforts in the country’s residential sector have faced considerable policy, market, and information barriers. The most severe are as follows: (i) Inefficient pricing signals and low energy efficiency returns, especially for power and DH. Regulated energy prices are set at levels below the full cost of service provision, thus giving households little incentive to save energy. As a result of the low energy prices, decades of under-maintenance and the prevalence of underheating, there are typically long payback periods associated with MAB renovations (estimated to be about 24 years for this Program, including structural measures and the need to bring comfort levels within national norms). (ii) Weak HOAs and an inability to take collective decisions on building refurbishment. The Condominium Ownership Management Act (COMA) requires that at least 67 percent of a building’s apartment owners agree to form an HOA, and that 100 percent agree to undertake an energy efficiency renovation—which can be difficult, particularly when many residents are lower-income or have moved out (while retaining ownership). A legacy of dilapidated buildings and poor maintenance, ambiguity about responsibilities for common areas, and poor service levels have created a pervasive culture of non-payment and general cynicism about HOA investments. As a result, dues generally cover very basic maintenance and cleaning and minor repairs but no major capital improvements. HOAs are also seen as high-risk in terms of taking loans and signing contracts. (iii) High transaction costs and lack of delivery mechanisms for thermal refurbishment. The actual implementation costs can be prohibitively high because (a) investment are relatively small and there are no aggregation/bundling mechanism in Bulgaria – such as housing management companies or energy service companies (ESCOs) – and (b) there have been no national-scale programs to help address the implementation issues associated with weak HOAs, access to commercial financing, and project preparation and delivery. Commercial banks are reluctant to lend to condominiums of multifamily buildings and to deal with many owners, or to lend to HOAs which have low technical and financial capacity. Dealing with so many individual owners also creates logistical issues with decision-making, individual apartment access (for audits/renovation), approving works, ensuring repayments, and so on. (iv) Lack of financial resources by homeowners to undertake energy efficiency investments. In energy-inefficient and structurally unsound MABs, homeowners often lack the means to provide the upfront capital investments needed to undertake energy efficiency renovations. While statistics on income levels based on building type do not, unfortunately, exist, there is a common view that panel-building residents have lower 6 incomes compared to average residential incomes. The state of the buildings, data on under-heating, lower property values, and similar observations all confirm this view. About 45 percent of such households report that they cannot keep the home “adequately warmâ€? and 34 percent indicate that they face arrears on utility bills, which are the highest in the EU, where the respective averages are 11 percent and 10 percent.7 (v) Skepticism about EE savings, which are difficult to quantify when access to reliable data is poor, baseline comfort levels (i.e., indoor temperature) are low, effective discount rates of homeowners are high (few make investments for payback periods longer than 3-5 years), and energy savings are contingent upon collective actions from other tenants. National Program for Energy Efficiency in MABs In response to these challenges, on February 2, 2015, the government launched a National Program for Energy Efficiency of Multifamily Buildings (hereafter referred to as “the Programâ€?) following the adoption of a related Council of Ministers decree. The Program aims to (a) improve energy efficiency in multifamily residential buildings, (b) extend the lifetime of apartment buildings, and (c) contribute to a reduction in local and global air pollution. The Program received an initial budget of BGN 1 billion (about €500 million) and, in January 2017, another BGN 1 billion was approved for the implementation of additional MAB renovations. The Program’s key characteristics are as follows: i. Targeting: The Program covers buildings in all 265 municipalities in the country and supports multifamily apartment building renovations. Buildings eligible to participate in the Program include pre-1999 panel, monolithic cement and brick buildings with three or more floors and six or more apartments, with priority given to the older, prefabricated panel buildings with the most serious structural deficiencies. To be able to apply for the Program, homeowners need to form and register a HOA in accordance with the Condominium Ownership Management Act (which requires the agreement of no less than 67 percent of the building apartment owners). Once their application is submitted (95 percent of homeowners must agree to participate in the program) and accepted, registered HOAs sign a contract with their respective municipalities authorizing them to manage the overall renovation process. ii. Financial support: HOAs are provided with 100 percent grant support to finance measures and related services8 on a first-come, first-serve basis to: (a) improve the energy efficiency of the buildings and common spaces (thermal insulation of building envelope, replacement of windows, improvements of the heating, electrical work, etc.); and (b) take measures to improve the structural soundness of the buildings to comply with the current building code, if needed. 9 Energy efficiency measures to be implemented are expected to bring the renovated buildings to the level of “Class Câ€? national energy performance certification (i.e., energy use of 191–240 kWh/m2) at the lowest cost. 7 Based on EU Statistics on Income and Living Conditions in Households, 2013. 8 This includes the upfront energy and structural audits (including issuance of the technical passport), preparation of technical designs and bills of quantities (BoQs), construction supervision and building performance certification. 9 The quality of the structural assessments for the technical passport is highly variable, ranging from simple visual assessments to more detailed investigations of maintenance, material standards, etc. (based on World Bank-MRDPW review currently underway). 7 iii. Financing: The overall cost of the Program is being financed by the State Budget through loans from international financial institutions (IFIs).10 The Bulgarian Development Bank (BDB) is responsible for mobilizing Program financing and channeling the resources through payments to the contractors on the basis of requests by municipalities acting on behalf of the HOAs in accordance with signed, tripartite contracts with the municipalities and district governors. In practice, BDB disburses funds to cover the costs for all contractor invoices once approved by the municipalities. Because there are no repayment mechanisms (i.e., the renovations are financed by 100 percent grants to homeowners), the State Budget reimburses the expenditures borne under the Program to cover BDB’s repayment obligations towards the IFIs. iv. Implementation Mechanisms: The Program is implemented by municipalities. They have responsibility for preparing project financing applications and signing the contracts, as well as for all procurement and supervision of the energy and structural audits, detailed designs, construction permits, construction works, construction supervision and building certification. Procurement is done in accordance with the Bulgarian Public Procurement Act. Supervision and oversight is done in line with existing national legislation and auditing and construction standards. v. Oversight: MRDPW is responsible for overall Program design, oversight and coordination role among government entities. The ministry developed and issued a set of “Methodological Guidelinesâ€? describing the Program’s objectives, eligibility criteria, procedures and institutional responsibilities. District governors, in their capacity as representatives of the state, oversee the Program in their respective district (Figure 2-1). Figure 2-1: Flow of Funds and Contractual Arrangements (Phase 1) HOA Special HOA account in BDB BDB operated by Municipality Municipalities District Governors Energy and Technical Auditors Designer/Contractor Contractual Arrangements Flow of Funds Other Service Services/Work Delivered Providers 10Financing was secured from the Council of Europe Development Bank (CEB), KfW Development Bank and the Industrial and Commercial Bank of China. 8 The Program Decree, published on February 2, 2015 has been amended four times: on May 8, 2015; October 19, 2015; 11 February 4, 2016; and January 25, 2017. 12 Initially, the Program covered all residential pre-fabricated panel buildings and buildings with monolithic in-situ cast concrete structures with more than 36 dwellings. In 2016, the Program was broadened to cover residential pre-fabricated panel buildings and buildings with monolithic in-situ cast concrete structures with more than three floors and six dwellings as well as pre-1999 MABs made of brick with reinforced concrete slabs with more than three floors and six dwellings. Program Results The Program was very successful in promoting the establishment of HOAs, with more than 6,800 registered since its launch in 2015 and 5,725 Program applications received by BDB. It also helped demonstrate the tremendous benefits associated with MAB renovations and energy efficiency measures. The energy efficiency industry—from energy auditors to design firms to construction companies—was also stimulated and supported under the Program. To date, the Program has allocated almost all of its BGN 2 billion budget and has approved 2,022 MABs for renovations.13 About 990 MABs have been completed and the rest are in various stages of implementation (Table 2-1). Of the approved MABs under the Program, 70.2 percent are panel buildings, 23.1 percent are multicast concrete (MCC) buildings, and 6.7 percent are brick buildings.14 On November 30, 2016, MRDPW instructed BDB to stop accepting applications as it determined that the Program budget was fully committed by the approved MABs. Table 2-1. Status of Phase 1 Number of registered HOAs 6,817 Number of applications submitted 5,725 Number of signed contracts for BDB financing 2,022 Total floor area (m2) of the approved buildings 11,433,922 Number of apartments in the approved buildings 147,761 Number of residents in the approved buildings 340,705 Status of approved MABs Number of commissioned renovated buildings 1,225 Number of buildings with construction ongoing 389 Number of buildings with construction not started 408 Source: Ministry of Regional Development and Public Works, May 30, 2018. 11 For example, in October 2015, MRDPW introduced reference prices for MAB renovations, setting them at BGN 142/m2 for panel and brick MABs over eight floors and BGN 154/m2 for MCC MABs over eight floors. 12 Key changes have been as follows: May 8, 2015—The minimum number of apartments in eligible buildings was decreased from 36 to 32 and the required percentage of homeowners needed to approve the investment was reduced from 100% to 95%. October 19, 2015—Reference prices for eligible costs were introduced, published with an order by MRDPW on October 26, 2015, and later updated. The last reference prices (issued October 6, 2016) are BGN 154.14/m2 for MABs up to 8 floors and BGN 172.14/m2 for buildings over 8 floors for all eligible costs. February 4, 2016—Brick MABs built prior to 1999 were made eligible and the minimum number of apartments in an eligible buildings was reduced to six. Also, the MABs not completed under the Energy Renovation of Bulgarian Homes Program were made eligible under the Program. January 25, 2017—An additional BGN 1 billion was approved for the Program. 13 Applications were approved on a first-come, first-serve basis. All of the unapproved applications remain in the pipeline for future phases; none have been rejected. 14 September 2017, Report on the National Program for Energy Efficiency of Multi-Family Residential Buildings, prepared by DZZD “BAKK-ESâ€? Consulting (commissioned by MRDPW). 9 Analysis of Phase 1 Analyses were conducted on the reported costs under Phase 1 in order to determine cost estimates for future phases. Unfortunately, the Program did not have a central monitoring system, so the costs from the initial energy audits, which are maintained by the Sustainable Energy Development Agency (SEDA), differ from the actual contract values from BDB which were about 87 percent higher (BGN 289 million in investments identified from the energy audits as compared to BGN 542 million from the BDB invoices for the first 547 MABs (2.8 million m2). The differences were due mainly to four factors: (a) reference pricing was introduced in October 2015 and pricing levels were subsequently revised; (b) SEDA audit costs included only the renovation costs, while the BDB database also included technical designs, construction supervision, etc.; (c) SEDA audits included only energy efficiency measures, while BDB included some structural and other measures; and (d) some market prices as a result of the bidding process differed from the energy audit estimates. While BDB payments do represent actual costs, their database does not include a breakdown of payments by type of service, type of measure, or other. Based on a sample of 107 completed MABs under Phase 1, the investments costs related to the implementation of the energy efficiency measures is about 75 percent.15 Figure 2-2 presents the correlation between the total investment costs for all project activities and the total area of the buildings. Additional analyses related to the investment costs under Phase 1 are included in Annex 1. Figure 2-2. Correlation Between Investment Costs and Floor Area All renovated buildings - investment costs from BDB DB 20000 18000 16000 Total floor area ,m2 14000 12000 10000 8000 6000 y = 0.1279x 0.7691 R² = 0.8335 4000 2000 0 0 1000000 2000000 3000000 4000000 5000000 6000000 Investment costs, BGN Source: SEDA and BDB databases According to the SEDA database, the estimated annual energy savings that would be achieved after all the measures were implemented is 934.3 GWh. However, it should be noted that many apartments reported underheating and, thus, the calculations are made on a “normalizedâ€? baseline, or the adjusted baseline assuming the apartment was heating at 20-22° C. The results of surveys conducted by MRDPW, carried out among a sample of apartment owners, show that the level of 15 MRDPW, September 2017. 10 comfort (temperature) increased by an average of 3.8° C after the implementation of the building envelope measures and some fuel switching, which was also eligible under the Program. Unfortunately, the Program did not include detailed monitoring of energy savings or site-specific temperature monitoring, so the results are based on interviews only. The most common measures recommended in the energy audits under Phase 1 were wall insulation and window replacement, which were included in all MABs renovated. Most MABs also included roof and floor insulation. Figure 2-3 summarizes the costs for energy savings (BGN/kWh) for the main types of energy efficiency measures. The results show that the measures that saved the most energy at the lowest cost were the building management and control systems (0.5 BGN/kWh) and the external wall insulation (0.91 BGN/kWh). Figure 2-3. Costs of Energy Saved, by Measure Investment costs per saved kWh energy by EE measures types 2.50 2.00 BGN/kWh 1.50 1.00 0.50 0.00 Average investment costs per saved kWh from all EE measures in all 2022 builidngs Source: SEDA database. MRDPW also conducted a survey of participants in the Program in 2017. According to the results of the interviews conducted on a sample of residents in the renovated MABs, there were a number of reported results and impacts from the renovations, including: ✓ Over 95 percent of the surveyed households noted an increased comfort level in their apartments, typically by 3-5° C, during the winter months. ✓ Over 80 percent of the surveyed households mentioned that their utility bills have gone down, and about 60 percent said it went down significantly. The average decrease of the heating bills was almost 25 percent. 11 ✓ Participants also reported less dust accumulation on the premises, lower noise levels, and increased building lifetimes – all of which they expect will contribute to an increased valuation of the property as a result of the full renovation of the building envelope. ✓ 64 percent of participating households indicated that they would “certainlyâ€? recommend the Program to other apartment owners. ✓ The residents also mentioned that the Program has enabled the homeowners to become more connected with one another, forming the basis for a more effective HOA in the future. ✓ No analysis was done on the quantity or quality of service providers, costs over time, etc. Lessons Learned MRDPW and stakeholders identified a number of areas that, if improved, could allow the Program to become a sustainable initiative that would help the Government achieve the target of renovating the rest of the more than 40,000 MABs that still need to be renovated. These were as follows: ✓ Overall satisfaction with the Program was very high, indicating the Program was very relevant to the needs of MABs and their HOAs. The Program did take time to accelerate to its full rate of implementation and it will be important to build upon this momentum going forward. ✓ The government did not formulate and communicate a long-term vision and strategy to renovate the full housing stock to the public, such as reducing the share of grants over time, introducing more self-sustainable financing option. As a result, the public’s expectation is to continue having a 100 percent grant financing option within the Program, which is neither feasible nor sustainable. ✓ Due to the decentralized nature of the Program within numerous municipalities of varying technical and human capacities, the Program lacked sufficient technical support and supervision on the national level. This led to a number of technical issues in the implemented projects—as well as a missed opportunity for building the capacity of various market players, such as energy auditors or design and construction companies. ✓ Despite providing 100 percent pure grant financing, the Program neither required any kind of participation nor imposed any responsibilities on its beneficiaries (e.g., reconnection to district heating DH systems where possible, ensuring proper operations and maintenance of the renovated MABs, potential increases in property taxes, tariff reforms including consumption-based billing for DH, opening of HOA bank accounts for future collections and borrowings, etc.). Now that the first phase of the Program has been completed (and having utilized the initial budget), MRDPW has acknowledged the need to develop a second phase of the Program which would include a more sustainable and scalable financing mechanism. This would include the need for the following: ✓ More sustainable financing schemes (e.g., better targeting and declining levels of grants, HOA/commercial bank co-financing) and diversified funding sources (e.g., Energy Efficiency Obligation schemes with white certificates for energy suppliers, EU Operational Programs, carbon emission trading revenues, revenues from renewable energy, apartment leasing to address occupancy rate issue, etc.); ✓ Improved technical quality and supervision, such as increased training for stakeholders, standardized audits/designs, reduced pace of implementation, centralized program 12 coordination unit, and the need for period evaluations to identify deficiencies and share lessons and plans to address structural deficiencies and seismic safety; ✓ More soft measures to support implementation, e.g., sample TORs for audits/designs, enhanced Program monitoring and evaluation including energy monitoring, post- renovation audits and energy performance certificate confirmation, outreach on Program procedures and impacts and importance of energy efficiency and HOAs, training of auditors/designers/construction firms, other technical assistance; and ✓ Policy support to strengthen HOA legislation and legal status—including the development of a long-term program plan to address the full building stock; strengthening of HOA legislation to improve ability to borrow, sign contracts, open bank accounts, etc.; increased obligations of HOAs to pay monthly fees to ensure proper maintenance and future capital repairs post-renovation; incentives to HOAs for measures to support air quality improvements, DH reforms and reconnections, housing policies, and climate change; enhanced building codes and building material standards; and property price reappraisals after renovation. 13 SECTION 3 – ELEMENTS OF A LONG-TERM PROGRAM Introduction As noted in Section 2, a missing element under Phase 1 was the lack of a longer-term vision and program plan for renovating Bulgaria’s entire building stock. Without this, neither the government nor the apartment owners had a clear idea how the full building stock would be financed, over what period it would be implemented, or what types of changes would need to be introduced. This created an expectation that the 100 percent grant would be available for all MABs, which is not feasible or sustainable. This section will suggest ways in which MRDPW can effectively address this need through a long- term program. It will define the required parameters and components, including objectives, institutional arrangements, funding needs, financing arrangements, TA/training requirements, timeline and program indicators/targets. More specifically, it will outline: • Suggested policy measures, such as the strengthening of HOA regulations (including requirements for establishing maintenance and capital renovation accounts), improved building codes and material standards, reconnections and new connections to DH where viable, and deployment of heat meters and internal controls; • Financing and funding mechanisms designed to reduce the grant amount (from 100 percent) over time by increasing HOA contribution (through HOA repayable grants or equity, commercial bank loans, ESCOs, maintenance companies, and public funds); • Capacity building for all stakeholders (energy auditors, design firms, construction companies, HOAs, municipalities, banks, etc.); and • Improved program infrastructure (building databases, monitoring and evaluation systems including periodic surveys, standard/template documents, etc.). Program Objective The objective of the long-term program will be the same as for Phase 1—namely, to (a) improve the energy efficiency of MABs to reduce energy expenditures and improve internal comfort levels, (b) extend the lifetime and safety of the renovated buildings, and (c) contribute to reduced local and global air pollution. The long-term program will include two components: ➢ Component 1: Renovation of multifamily apartment buildings for energy efficiency and structural safety ➢ Component 2: Regulatory support and technical assistance Program Eligibility The long-term program eligibility criteria are assumed to be the same as in Phase 1,16 in terms of eligible buildings, eligible measures (e.g., renovation works for structure rehabilitation/ strengthening to meet safety requirements and codes, and implementation of energy efficiency measures identified in the energy audit required to achieve Class C or higher) and services (e.g., structural and energy audits, technical designs, construction supervision). However, the long-term 16 National Program for Energy Efficiency of Residential Buildings – Methodological Guidelines (October 2015) 14 program will adopt a broader scope to incorporate complementary public policy goals into the program, such as linkages with district heating reforms, promotion of renewable energy, structural and seismic safety, housing reforms, etc. as well as provisions for parallel implementation support to cover program coordination, technical assistance, training, outreach and monitoring and evaluation. Since a number of the MABs renovated under Phase 1 actually exceeded the Class C levels,17 it is recommended that the long-term program support energy efficiency measures identified in the energy audits that are cost-effective—i.e., the package of measures that maximize the net present value (NPV), which in many cases may lead to Class B levels. In addition, it is proposed that the long-term program also provisions for improved program oversight, monitoring and training/TA, as well as additional support for measures that address related public policy goals—for example, incentives for apartments to reconnect to DH where available, fuel switching to address air quality issues, or additional support for MABs in underdeveloped or low-income regions or municipalities. Funding Levels Funding levels required for the life of the long-term program were estimated based on the data on the full building stock, results and data from the first phase, and the timeframe required to complete all the remaining buildings. Need for a Multi-Phase Set-Up The long-term program should provide a roadmap showing clearly how the government would support renovations in the remaining eligible MABs. This would help set appropriate expectations and introduce predictability of funding needs and availability. It would also send a signal to the market (i.e., banks, auditors, design and construction firms, and material producers) that the government intends to renovate the country’s entire building stock, so that businesses can plan accordingly. Of course, it is understandable that the government would not be able to make such long-term budgetary commitments, so the funding amounts in outer years may have to be notional. However, if the Program remains popular and effective, as has been the case in most newer EU Member States, the Program should be able to continue to receive strong political support in future years. Therefore, the first issue analyzed was the required pace of the long-term program, duration and number of phases needed to renovate the almost 44,000 MABs that remain (Table 3-1). Under Phase 1, more than 2,000 MABs were renovated in about four years (2015-18), which resulted in the renovation of about 500 MABs per year—although the number renovated in the later years was higher as only about five MABs were renovated in the Program’s initial year (2015). MRDPW and other stakeholders determined that this pace was very fast and put a strain on all Program actors—MRDPW, municipalities, BDB, SEDA, energy auditors, design companies and construction firms. The fast pace also may have contributed to some technical deficiencies given the limited ability for proper technical oversight and quality control. Thus, this level was determined to be an upper limit for the longer-term program. 17 Out of 2,022 MABs under Phase 1, one MAB received a Class A certificate, 170 buildings met energy Class B, 1,848 MABs met energy Class C and two buildings met energy Class D. 15 Table 3-1. Status of Building Stock Number of MABs Number of MABs Number of MABs Number of remaining Building type built before 1990* to be renovated completed in Phase 1 MABs to be renovated Panel 11,004 9,664 1,419 8,245 Brick 41,910 27,949 135 27,814 MCC 11,778 6,266 467 5,799 Total 64,692 43,879 2,021 41,858 * Includes MABs without commercial areas. Source: National Statistics Book. Based on the national statistics and MRDPW survey,18 there are about 41,858 MABs remaining to be renovated. Several options were analyzed: • At the rate of 200 MABs renovated per year, it would take 209 years to renovate all the remaining buildings. • 400 MABs/year would take 105 years. • 200 MABs/year plus an increase of 10 percent per year would take about 32.5 years. • 400 MABs/year plus an increase of 10 percent per year would take about 25.5 years. • 500 MABs/year plus an increase of 10 percent per year would take about 23.5 years. Given the need to complete the renovations prior to 2050 and the current market capacity, it is recommended that: ✓ The long-term program should seek to renovate about 400 MABs per year with an increase of 10 percent per year, which would allow all targeted MABs to be renovated by 2044.19 ✓ The long-term program should be implemented over a 25-year period, with six 5-year phases (Table 3-2).20 Table 3-2. Target Number of MABs to be Renovated in Each Future Phase Phase 2 3 4 5 6 Total Time period 2019- 2024- 2029- 2034- 2039- 2023 2028 2033 2038 2044 Number of MABs to be renovated 2,442 3,933 6,334 10,201 18,948 41,858 Renovation Costs The profile of the remaining MABs to be renovated is shown in Table 3-1. Given that Phase 1 focused on larger panel MABs (with over 70 percent of all buildings renovated under Phase 1 being panel-type construction), the long-term program assumes lower costs per building than in the first phase due to smaller MAB sizes—although the second phase will likely focus on applications received under Phase 1 but not approved due to budget limitations. At the same time, it is likely that the full renovation costs will be higher if structural measures and other eligible activities (e.g., heating system upgrades or RE systems) are included. 18 MRDPW, September 2017. 19 While it is likely that a 10% increase each year would be difficult, it is also expected that over this 25-year period, some buildings would likely be demolished, some would renovate on their own, etc. —such that the actual number of MABs that the long-term program would need to support would be lower. 20 The final phase would require six years to fully complete the remaining building stock. 16 Of the remaining building stock to be renovated, about 66 percent are brick type, 20 percent are panel and 14 percent are MCC. The average total area per building is estimated to be 4,160 m2 for panel buildings, 2,160 m2 for MCC buildings, and 1,230 m2 for brick buildings for the remaining 41,858 MABs (Table 3-3). Due to the change in composition of the buildings between Phase 1 and future phases, the average investment per unit floor area will increase from 158 BGN/m2 to 166 BGN/m2, while the average size of the MAB will drop from 3,502 m2 to 2,425 m2, and the average investment per MAB will then drop from BGN 553,895 per MAB to BGN 430,646 per MAB. Based on these data, and assuming a rate of inflation of 2.5 percent (with an average inflation rate of 7 percent from one phase to the next), the total investment cost for completing the renovation of the remaining MABs will be around BGN 21 billion for Class C or higher. Table 3-3. Assumptions for Long-term Program Costs Unit Assumed value Average investment (area) BGN/m2 166 Average size (MAB) m2/MAB 2,425 Average investment (MAB) (with inflation) BGN/MAB 430,646 Annual rate of inflation % 2.5 Subsidy Levels In order to transition the long-term program from 100 percent subsidy under Phase 1 to a more sustainable and market-oriented approach, it is necessary to reduce the level of subsidy in each future phase. Over time, the level of HOA cost-share can be increased, as financing and implementation models are further developed, the markets become more mature, and hopefully building material costs decline. Table 3-4 includes an analysis of different levels of subsidy on the payback periods to apartment owners. Based on this analysis, homeowners could repay the investment costs in about 2.5 years at an 80 percent subsidy level, 6.2 years for a 50 percent subsidy level and just under 10 years at a 20 percent subsidy level.21 Table 3-4. Financial Parameters Based on Subsidy Levels Subsidy level 80% 70% 50% 30% 20% 0% Simple payback period (yrs) 2.5 3.7 6.2 8.7 9.9 12.4 NPV (million €) 450 427.6 383.3 339.0 316.8 272.6 Internal rate of return (%) 43.4 29.8 18.7 13.6 11.8 9.2 Notes: Based on 547 completed buildings from BDB and SEDA databases, based on latest reference prices including VAT, energy savings from energy audits in SEDA database, 2.5% inflation, discount rate of 2%, average energy price of 140 BGN/MWh with annual increase of 2%. Costs do not include non-EE measures, such as structural repairs, internal piping, fuel switching, etc. that may increase payback times. Given the 100 percent subsidy level under Phase 1, there are high expectations that future phases of the program will offer comparable levels. Further, given that there were more than 5,725 applications received under Phase 1 and only 2,022 applications accepted, there is a pipeline of 3,703 applications that are expecting a 100 percent grant. Thus, it is recommended that the long- 21The European Commission (EC) requires that subsidies to private businesses or individuals be less than 88% for use of EC operational program funding. 17 term program offer a relatively high subsidy for the second phase which will decline over time. For the analysis, two options were considered: ✓ Option 1: 80 percent subsidy in Phase 2, to be reduced by 20 percent in each subsequent phase; and ✓ Option 2: 70 percent subsidy in Phase 2, with 15 percent reduction in each future phase. Both options assume a floor subsidy of 30 percent, which is comparable to most other Eastern European countries. The declining subsidy levels will create better expectations and predictability for potential participants and market actions while helping to ease the transition to more commercial financing in the future. It also rewards early participants. Based on these options, the total subsidy requirements for Option 1 would be BGN 7.7 billion, and for Option 2 BGN 7.5 billion (Table 3-5, Figure 3-1). Based on this analysis, it is recommended that the program proceed with Option 1.22 (Program administration costs are not included in this analysis but are generally around 3-5 percent of total costs.) Table 3-5. Subsidy Costs for a Long-Term Program Time 2019-2023 2024-2029 2030-2034 2035-2039 2040-2044 Total Total # of MABs 2,442 3,933 6,334 10,201 18,948 41,858 Average investment cost per 554 431 461 493 528 MAB (BGN thousand) Total investment (BGN million) 1,353 1,694 2,919 5,030 9,996 20,991 Percent of Subsidy Option 1 80% 60% 40% 30% 30% 37% Total grant subsidy under Option 1,082 1,016 1,167 1,509 2,999 7,774 1 (BGN million) Percent of Subsidy Option 2 70% 55% 40% 30% 30% 36% Total grant subsidy under Option 947 932 1,167 1,509 2,999 7,554 2 (BGN million) Long-term Program Oversight and Technical Assistance The long-term program should include a number of policy, outreach, training and TA, monitoring and evaluation (M&E), and coordination functions that were absent or underdeveloped under Phase 1. These parallel activities will be critical to help bolster program activities through policy and regulatory enhancements, capacity building, public awareness raising and monitoring to enable the program to continue to improve over time and ensure longer-term sustainability. 22For 20% cofinancing, the annual repayable amount for each HOA would be only 2% per year over 10 years. Based on data from Phase 1, the average investment per MAB was about BGN 1 million. Thus, for an average MAB of 30 apartments, the monthly repayment would only be about BGN 55.54. 18 Figure 3-1. Investment Amounts and Subsidy Requirements for a Long-Term Program 16000 20000 14000 18000 16000 12000 14000 Number of MABs 10000 BGN million 12000 8000 10000 6000 8000 6000 4000 4000 2000 2000 0 0 2019-2023 2024-2029 2030-2034 2035-2039 2040-2044 Year Total number of MABs Total investment (BGN million) Total grant subsidy under Option 1 (BGN million) Total grant subsidy under Option 2 (BGN million) In terms of the policy and regulatory framework, the long-term program should include a number of enhancements that can be introduced in subsequent phases in order to strengthen the obligations alongside the voluntary program subsidies and renovations. These would include: ✓ Strengthening of the HOA legislation23—to help ease the voting threshold for establishing and registering an HOA, reduce the percentage of votes required for building renovations, introduce (and later oblige homeowners to pay) monthly fees for basic maintenance services and for future capital renovations, strengthen HOAs’ ability to open bank accounts (for both routine maintenance and longer-term capital renovations) and sign contracts, develop mechanisms for HOAs to borrow from commercial banks and help ensure repayments, support the creation of professional maintenance companies and HOAs’ ability to hire them for both maintenance and renovation services and monthly fee collections, strengthen building inspections, and other necessary actions. ✓ Improve and update construction codes—to help enhance building codes, seismic safety and stability requirements and enforcement, building material standards, energy auditor/ design/construction licensing, fire protection, construction supervision, construction worker skills, energy performance class requirements, etc. as markets and technologies evolve. Building codes and standards can also be updated to incorporate life-cycle cost analyses, to develop cost optimal measures for higher energy efficiency performance standards (e.g., Class A, A+ or nearly zero-energy buildings, NZEBs). ✓ Continue electricity and heating reforms—including rationalizing DH service and pricing, promotion of DH reconnections where service levels are adequate, introduction of consumption-based billing at apartment level, deployment of heat meters, thermostatic radiator valves and heat cost allocators, promotion of retrofits to horizontal piping, alignment of energy pricing to discourage electric heating, promotion of fuel-switching to 23 The World Bank’s Bulgaria Housing Sector Assessment: Final Report (2017) includes a more comprehensive assessment of legislation related to housing and HOAs. 19 cleaner fuels including RE, promotion of building-level heating systems for MABs without access to DH, etc. ✓ Enact and update other legislation to support HOAs and building renovation efforts—such as support for ESCOs to act as maintenance companies, regular property price reappraisals after renovations (to help allow partial program reimbursement), transfers of MAB land from municipalities to HOAs, introduction of apartment leasing to address high vacancy rates, 24 linking of recently enacted energy efficiency obligations (EEOs) for energy suppliers to MAB renovation programs, introduce emissions reduction trading to support MAB renovation schemes, development of additional banking products and repayment security mechanisms for HOA borrowings, etc. In terms of outreach and training, a number of provisions are recommended for the long-term program using a variety of media,25 such as: ✓ Carrying out public campaigns to homeowners to promote the benefits of HOAs, energy efficiency and building renovations, educational measures and promotional activities to participate in the long-term program, explanation of the declining investment subsidies and potential sources for cofinancing, dissemination of program procedures and benefits, sharing of program lessons and results, promotion of the use of maintenance companies to support HOAs, promotion of the adoption of cleaner fuels and RE, and support for DH connections and reconnections, consumer information on efficient appliances; ✓ Designing and implementing regular training programs for all program actors (e.g., municipalities, homeowners and HOAs, service providers, and banks) on program requirements and procedures, best practices and case studies, deficiencies of earlier renovations and documentation of lessons learned, etc.; ✓ Delivering training workshops to HOAs and municipalities on proper building operations and maintenance, procurement, contract management, construction supervision, program reporting requirements, etc.; and ✓ Developing standardized documents and templates for various program elements— including model energy audits, structural audits, design reports, and terms of reference— to ensure consistency and reduce future preparation costs. A number of measures are needed to support the program coordination and M&E function, including: ✓ Developing and maintaining a building stock within MRDPW and database on building energy consumption, along with other relevant data (e.g., date of building renovations, energy performance levels, fuel use, etc.); ✓ Ensuring program procedures, templates, sample documents, guidelines, etc. are easily accessible to all potential program participants on websites and through municipalities; ✓ Developing and implementing a consolidated program M&E system (including an integrated IT systems) which supports data submission and collection, data review and cleaning, analysis and reporting—along with the introduction of energy monitoring 24 In Sofia district, for example, vacancy rates are as high as 48%, which makes building renovations very difficult to pay for among the remaining residents. 25 Sample outreach materials developed in other countries are as follows: Lithuania http://atnaujinkbusta.lt/ ; Poland https://www.bgk.pl/samorzady/fundusze-i-programy/fundusz-termomodernizacji-i-remontow/; Slovakia https://www.sfrb.sk/ziadatel/obnovujte-s-nami/; Estonia http://kredex.ee/ru/korteriuhistule-4/laen-ja-kaendus- 2/korterelamulaenu-kaendus/. 20 systems in order to better document program impacts, support post-renovation energy audits to verify energy savings; ✓ Conducting annual surveys, periodic program evaluations, etc. to assess satisfaction, document deficiencies, solicit feedback, collect socioeconomic indicators (e.g., income levels, gender impacts, disabled beneficiaries, etc.) and share lessons with program administrators and participants; and ✓ Adjusting subsequent program phases based on evaluations, feedback and lessons learned. The program coordination and outreach should be introduced right away under Phase 2 but will continue to evolve over time. The policy and regulatory enhancements need to be carefully sequenced over the future phases. The full framework of the long-term program is summarized in Figure 3-2. Figure 3-2. Framework for Long-Term Program Source: Adapted from World Bank, 2014. Long-Term Program Performance Indicators The consolidated M&E system noted earlier should include a list of program performance indicators and targets (broken down by phase) that would be reported and tracked throughout the program phases. These could include: ✓ Projected lifetime energy savings in renovated buildings (MWh); 21 ✓ Number of MABs renovated that meet local construction codes and include the most cost- effective package of measures (i.e., at least Class C); ✓ Area (in square meters) of renovated MABs; ✓ Reductions in associated CO2 emissions from energy savings (in tonnes of CO2e); ✓ Number of registered HOAs; ✓ Number of beneficiaries; ✓ Number of participating banks; and ✓ Number of established and active maintenance companies. Other indicators could include: reduction in airborne particulate matter (parts per million), reduction in SOx/NOx (tonnes), completed and approved energy audits/designs (number), satisfaction with the Program (percentage), delivery of training and outreach events (number), estimated increase in property price (BGN), MABs with cleaner heating fuels (number), installed renewable energy systems (MW), and so on. The program will also contribute to a number of broader societal benefits, some of which may be difficult to track. However, the collection of anecdotal information and qualitative data (from interviews, surveys, feedback, etc.) could help assess some of these impacts. These are important to collect where possible to help justify the program to policy makers and to build broad public support for the long-term program. These may include: ✓ Improved social cohesion (from stronger HOAs and communities); ✓ Urban renewal (from visual impacts of renovated buildings); ✓ Addressing of the huge contingent liability from dilapidated and undermaintained buildings, including those that are not seismically sound; ✓ Economic growth and employment generation; ✓ Enhanced financial viability of district heating systems (through the promotion of reconnections); and ✓ Help to meet various EU obligations and avoid fines and infringement procedures. 22 SECTION 4 – KEY DESIGN OPTIONS FOR PHASE 2 Institutional Setup As described in Section 2, the institutional set-up under Phase 1 included: a. MRDPW as the ministry responsible for overall Program coordination; b. BDB as the mobilizer of IFI loans and the payment agent; c. MOF as the ministry responsible for guaranteeing the IFI loans to BDB and allocating state budget for the reimbursement of BDB for completed MAB renovations; d. Municipalities as the main implementing agencies—responsible for submitting applications with HOAs, entering into tripartite agreements, conducting all service and works procurement, overseeing contractors and approving invoices; and e. District governors as signatories to the tripartite agreements with some oversight responsibilities within their respective jurisdictions. With the proposed introduction of cofinancing under Phase 2, and building on the lessons learned from Phase 1, the program would have to amend its institutional set-up. The institutional arrangements at the State level would be similar under Phase 2, with MRDPW as the program coordinator (with expanded functions as noted in Section 3 to include management of outreach, TA and M&E) and municipalities as key partners in the implementation. Similarly, a financial institution (hereafter referred to as a ‘Holding Fund’) would be needed to mobilize funding and administer financial flows. To support the introduction of cofinancing, it is proposed to introduce a new set of institutions in the form of (a) financial intermediaries, such as local banks, to help provide the necessary cofinancing; and (b) “implementing intermediariesâ€?— which can include public or private maintenance companies, municipalities, ESCOs, utilities or other qualified entities—that could borrow the required cofinancing amounts on behalf of the HOAs, help manage the renovations, and collect HOA fees/repayments. HOAs would remain as the main beneficiaries but would have additional obligations under Phase 2 to start regularly paying maintenance fees in order to facilitate cofinancing and ensure program sustainability. An analysis was done on the various institutional set-up options for the primary implementing agencies involved in the flow of funds, including the Holding Fund, financial intermediaries, implementing intermediaries and HOAs. These institutions, and their possible roles, are summarized in Table 4-1, based in part on experiences elsewhere in Eastern Europe. Not all levels need to be involved in the program management and implementation. Based on these various levels of institutions, eight institutional options were analyzed (Figure 4.1). The first set of options (1-4) includes a program structure with a Holding Fund or HF. Such a set-up is consistent with Phase 1, where BDB served as the HF. These schemes have four advantages: (a) the HF can consolidate financial resources (e.g., government budget, IFI loans, EU funds) to implement investment programs; (b) MRDPW can delegate tasks to a single entity to reduce its management burden; (c) it is easier to attract financial resources from IFIs, which are not designed to deal with sub-sovereign (regional/local) levels or multiple borrowers; and (d) HFs can be assigned to take risks that local banks (FIs) are unwilling to assume. 23 Table 4-1. Proposed Institutions Under Phase 2 1 level- A national or regional institution (e.g., fund, fund of funds, development bank, Holding fund agency) that: (HF) - attracts financial resources to Program from IFIs, EU, donors, government and other sources; and - distributes financial resources to the beneficiaries directly or via financial intermediaries. 2 level- A commercial bank or other financial institution that: Financial intermediary (FI) - distributes the HF and/or own cofinancing investments to the beneficiaries; and - provides additional co-financing and/or pre-financing to the beneficiaries. A municipality, municipal enterprise (e.g., maintenance company, utility) or 3 level- other* that: Implementing - represents the final beneficiary (funding application, procurement, intermediary (II) implementation control); and - borrows on behalf of beneficiary and collects repayments through the energy savings mechanism. 4 level – HOAs or apartment owners that: Final beneficiary - take the decision to invest into the EE measures (based on majority vote); (FB) - execute part or all of the implementation tasks if they are not performed by (or there is no) II; and - repay their portion of the investment. * For example, energy traders that are obligated to achieve energy savings. Figure 4-1. Institutional Options for Phase 2 24 However, such structures also have drawbacks: (a) they reduce government control over program implementation; (b) the terms and conditions of the HF need to be developed and negotiated with appropriate management and administrative fees; (c) MRDPW would need to develop sufficient monitoring and control mechanisms to ensure funds are used for their intended purposes; (d) HFs may require additional capacity building to carry out all of their functions; and (e) HFs may not be willing to take on all risks associated with lending to HOAs. The next two options (5 and 6) involve FIs without an HF. These options are consistent with typical credit lines, which are common in the region, mostly for industrial and commercial energy efficiency investments. There are a number of advantages to such set-ups: (a) using FIs allows the program to engage directly with commercial banks and introduce banking products for HOAs, while ensuring long-term sustainability; (b) FIs can utilize their own funds, thereby reducing the amount of financing the government would need to raise for the program; (c) the program could rely on existing FI financial capacities, thus reducing the need for TA provision and allowing for a quick start-up; and (d) HOAs can be obliged to open maintenance and capital renovation accounts with the lending banks, thus helping to ensure repayments. But options 5 and 6 also have potential weaknesses: (a) as with the first options, MRDPW has less control over day-to-day program implementation and ability to direct FIs to finance HOAs; (b) MRDPW may have to conduct a selection process and complete due diligence on the participating FIs; (c) FI monitoring and control mechanisms may have to be developed with the government; (d) MRDPW would need to make additional administrative and coordination efforts to manage multiple FIs; (e) the terms and conditions for participating FIs would need to be developed, along with negotiated fees paid by the government or HOAs; (f) FIs may require TA to develop suitable securitization of loans to HOAs and to assess energy efficiency investments; and (g) FIs may be unwilling to assume all risks associated with lending to HOAs, which may limit program coverage. Options 7 and 8 involve governance structures that do not include an HF or FIs. Such set-ups could allow the program to (a) provide direct financial support at the investment level without setting up new delivery and financing mechanisms; (b) launch more quickly, since no upfront negotiations with an HF or FIs would be needed; (c) assume more direct control over program implementation and monitoring (by interacting with program implementing entities, collecting feedback, and identifying implementation issues); (d) avoid paying the management fees that the HF and FIs would require, thus reducing financing costs; and (e) ensure that funds are accessible to all eligible program participants without perceived risks of nonpayment or creditworthiness restrictions. However, such a scheme would also (a) impose additional administrative burdens on MRDPW for day-to-day program management; (b) require government agencies to have strong fiduciary controls and adequate, qualified staff and resources; and (c) oblige the government to establish mechanisms for funding and repayments of many small loans. The introduction of implementing intermediaries (IIs) that can support HOAs to cofinance investments, help oversee contractors and help collect repayments offers several advantages to the program. Although municipalities served as IIs under Phase 1, the introduction of a cofinancing requirement and repayments requires the identification of a broader pool of potential professional IIs that can undertake these functions. However, to date, most of these IIs do not yet exist and potential candidates either lack the willingness or ability to perform these functions—chief among them is the strong balance sheet needed to take on sufficient debt to serve several HOAs. Despite 25 this, many other Eastern European countries, including Lithuania, Croatia and Belarus, have relied extensively on IIs (mainly through municipal maintenance companies) to carry out these functions. Based on the analysis above, it is recommended that MRDPW select Option 2 (HF with IIs) for Phase 2.26 The HF can help mobilize the required funding for Phase 2 and assume day-to-day management with a program implementation unit (PIU) appointed for this program. While FIs are a desirable addition, discussions with select local banks suggest they are not yet willing to assume the risks associated with lending to HOAs and the financing costs to cover their perceived risks may be very high. IIs can serve an important bridge between the HF and HOAs, help recruit HOAs, and ensure strong program implementation. However, given the currently nascent state of maintenance companies and other prospective IIs, the Program should seek to encourage a broad range of II models, including (a) municipalities, some of which may be able and willing to borrow and collect repayments; (b) financially strong utilities, given the current EEO regulations; and (c) facility management firms/ESCOs/construction firms, which can be encouraged to assume such functions under the program’s parallel activities. In fact, in some countries with developed maintenance companies, the need to establish HOAs has been less critical as these firms can identify investment needs, present them to homeowners directly, monitor voting, and implement approved projects which would be paid from homeowner monthly fees. Financing Options Overview of Financial Products Residential energy efficiency programs in the region typically utilize the following financial products: grants, loans blended with grants, and repayable grants. An overview of financial products along with their respective advantages is provided in Table 4-2. MRDPW will require a systematic approach to design the most suitable financial products for Phase 2. A continued program with 100 percent grants would not be sustainable and would provide high expectations to the owners of the more than 41,000 MABs that need to be renovated that the government will fully cover all renovation costs. It would also not create a culture in which HOAs are expected to begin to assume responsibilities for their MABs or introduce mechanisms for more market-based financing. Moreover, it would require substantial budgetary resources to fully renovate the remaining building stock. On the other hand, the introduction of commercial loans, paired with grants, would appear at present to be very difficult to introduce given the nascent commercial lending market for collective loans to HOAs. Further, for the more than 4,000 applicants who submitted applications under Phase 1 that could not be approved, there are high expectations that the government will continue to support their MAB renovations. Therefore, it is recommended that the most suitable financing product for Phase 2 would be partially repayable grants. Such mechanisms would allow HOAs to receive the full costs for the MAB renovation upfront and then recover part of the costs from various mechanisms. It would also not require HOAs to access commercial bank loans or mobilize homeowner contributions, which could seriously slow down program implementation. Once the renovation has been completed, the HOAs would be obligated to repay part of the grant, which will be facilitated by 26However, efforts should be made under Phase 2 to engage with local banks in order to include them as an integral part of future phases. 26 the realized energy cost savings from the renovation. The repayable component of the grant could vary from 20 percent to 70 percent of the total investment based on the expected energy cost savings, ability to repay (affordability) and other factors. As noted in Section 2, it is proposed that Phase 2 include an 80 percent subsidy element, which would imply a 20 percent repayable grant. This repayable grant would be increased in subsequent phases of the long-term program. Table 4-2. Financial Products for Residential Renovation Programs Advantages Weaknesses Grant (100%) • Attractive to homeowners • Require sufficient public financial resources • Simpler to administer than loans • Reduces incentive to for cost control and efficiency Loan + grant • Brings more discipline to the program and • More complicated delivery mechanisms than grants beneficiary • Requires more time to setup financial instrument • Facilitates private financial sector participation • Less attractive to homeowners than grants • Allows for recycling of loan repayments for • Contractual covenants for the borrowers new projects Partially repayable grant (20-60%) • Brings more discipline to the program and • Requires sufficient public financial resources for beneficiary non-repayable part of the grant • Allows for the recycling of grant repayments • Less attractive to homeowners than grants for new projects • Can be less complicated than loans • Can facilitate the transition from Phase 1, which had a 100% grant Potential Borrowers and Repayers Borrowers—or, more precisely, recipients of the repayable grants—would be required to repay the funds over a fixed period of time, typically 5-10 years. These recipients can be HOAs directly, or entities representing HOAs such as IIs. The repayers are ultimately the apartment owners who directly benefit from the grant in terms of reduced energy bills, improved comfort, safe buildings and more livable residences. While a developed market would rely on HOAs to take loans and repay them, the less developed market in Bulgaria may consider alternate options for borrowers and repayers, such as: • The State or central government could be the borrower and mobilize funds from IFIs, international capital markets or local banks, and then allocate them to the final beneficiaries as a grant or as a sub-loan. If grants are provided, the government must allocate sufficient resources for the loans to be repaid. • A Holding Fund, typically a national public development bank, may borrow on behalf of the program or government from IFIs, sometimes with the help of a state guarantee. The HF would allocate the funds, either as loans or grants, to program beneficiaries and then recover the repayments (from HOAs/IIs in the case of loans, or from the government in the case of grants). This was the case for Phase 1. 27 • Regional governors could serve as the borrower instead of the central government; however, as in the case of the HF, it will typically require a state guarantee. The regions would then channel the funds to the program implementing agencies or beneficiaries, either as loans or grants. Regional governors would repay the loans the same way as HFs, either through loan repayments from the sub-borrowers or from government budgets. • Municipalities could be sub-borrowers from the government, HF or regional governor, essentially serving as an II under the program. However, a major constraint to municipal borrowing is the regulated debt limits. In many countries, it can also be legally problematic for municipalities to borrow on behalf of private HOAs. Municipalities could repay using the same methods as with the HF and regional governor options. • Implementing intermediaries such as maintenance companies, utilities, ESCOs or others could act on behalf of HOAs and become the sub-borrowers of program resources. This would be particularly attractive in cases where the other sub-borrowers (e.g., HOAs or municipalities) are unwilling or unable to borrow. It can also create a more sustainable structure, since IIs can continue to maintain and repair the MABs after the renovations are completed. In some cases, municipalities would appoint or competitively select program IIs while in other cases, HOAs could select their own company. The IIs can then borrow on behalf of the HOA, oversee the renovation works and collect monthly fees/installments for the loans to eventually be repaid. • HOAs can borrow from national programs once they have been registered and following a majority vote by the homeowners. HOAs could take loans directly, oversee renovation works and repay the loans from fees/installments from each homeowner. However, HOAs must be able to borrow, must have mechanisms in place to enforce homeowner monthly payments, and should have or appoint qualified people to oversee the renovations. • Apartment owners can be sub-borrowers, but this not a common option as the homeowners would then need to pool their loans in order to renovate the full MAB. However, in the case of HOA or II borrowing, apartment owners can serve as the primary repayers of the loan since they are the main beneficiaries. Repayment Sources Repayment sources of the thermo-modernization investments are often energy cost savings, but such investments have also been repaid in a variety of other ways. The following are examples of other sources of funds for the repayable grant: • Monthly payments from apartment owners. All apartment owners are paying monthly energy and other utility bills and will, eventually, need to begin paying monthly fees (per square meter) sufficient to cover basic maintenance and future capital renovations. These monthly fees are typically set in a legal act and can be differentiated between routine maintenance, capital renovation and thermo-modernization investments. The fees can be raised temporarily when a renovation is initiated to cover the basic fees plus the amortized repayable grant amount; however, the fee levels should be set low enough to ensure homeowners can afford them. • Property taxes. Currently, such taxes are collected from all apartment owners, with rates set in the relevant legal acts. If the government provides a grant for the renovation, it can 28 justify a reassessment of the property after the renovation and use this higher tax payment to recover the repayable portion of the grant. • Revenues from emissions trading. In countries which have established emissions trading regimes, energy efficiency investments (including those for MABs) can generate emissions reduction credits that can then be sold via the EU emissions trading system. Since the government is providing a grant for the renovation, they could sell these credits and use the revenues to recover a portion of the repayable grant. However, it is unlikely to be a reliable or stable source of repayment.27 • Obliged parties. Under the recently enacted EEO scheme, energy suppliers are required to achieve certain levels of energy savings within their customers ’ premises, including MABs. As the energy utilities in Bulgaria plan their activities, their participation in Phase 2 through some support schemes could help them meet their obligations. • Municipal budgets. Local budgets and tax revenues are another source of repayment for the repayable grant under the program. However, most municipalities in Bulgaria lack sufficient budget revenues to cover subsidizing HOA investments. Financing and Repayment Options Based on the various options for financing and repayment, four options were further analyzed for Phase 2; these are summarized in Figure 4-2. Figure 4-2. Repayment Options for Phase 2 INVESTMENT REPAYMENT PERIOD: 10 years PERIOD: 2 years Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Option 1 Gov. grant 100 % HOA repays 20% loan plus interest over 10 years Gov. HOA HOA HOA HOA HOA HOA HOA HOA HOA HOA HOA Option 2 grant loan 2% + 2% + 2% + 2% + 2% + 2% + 2% + 2% + 2% + 2% + 80% 20% int. int. int. int. int. int. int. int. int. int. HOA repays 20% repayable grant over 10 years Gov. grant 80%, HOA HOA HOA HOA HOA HOA HOA HOA HOA HOA Option 3 repayable grant 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 20% Reduce loan to be repaid In case of the loan: HOA repays the remaining loan 20% plus interest HOA own Gov. HOA HOA HOA HOA HOA HOA HOA HOA HOA Option 4 financing or loan grant 2% + 2% + 2% + 2% + 2% + 2% + 2% + 2% + 2% + 100% 80 % interest interest interest interest interest interest interest interest interest 27 As a surplus of spare allowances continues to cripple the EU emissions trading system, the EU institutions are debating a proposal to repair the scheme. 29 Conclusion on Financing and Repayment Scheme Based on the analysis in this section, it is recommended that Phase 2 introduce Option 3, which features a 20 percent repayable grant. This option would not require HOAs to provide upfront financing or take a commercial bank loan, both of which would be very difficult today. The government would still offer a 100 percent upfront grant, similar to Phase 1, which would make it more appealing to the more than 4,000 HOAs that have already applied for the program. Over a 10-year proposed repayment period, the repayable grant amount would represent only about 2 percent of the total investment each year, which should be less than the expected energy cost savings, making it affordable for most apartment owners. These repayable grants could be used to finance additional MABs until the IFI or other loans to the HF are due. 30 SECTION 5 - RECOMMENDED DESIGN FOR PHASE 2 This section outlines the proposed design for the second phase (Phase 2) of the six-phase, 30-year National Program for Energy Efficiency of Multifamily Buildings based on the analysis in previous sections. As a first step, the government should adopt the framework for the long-term program outlined in Section 3, and communicate this longer-term plan with all stakeholders. It will also be necessary to explain the goals of the program, specifically the need to reduce the levels of subsidy over time and eventually transition to a more market-based scheme. Such a transition will necessitate the strengthening of HOAs and the introduction of an obligation to pay monthly fees in order for the program to recover the non-grant portion of the investment cost and to ensure MABs renovated under the program are maintained going forward. The specific provisions for Phase 2 are described in this section. As several elements are the same as for Phase 1, these aspects are only briefly summarized. Those aspects that would differ from Phase 1 are noted in italics. Once these elements have been agreed with MRDPW and the relevant government agencies, Phase 2 should be launched as early as possible (preferably before end 2018) to maintain the momentum created under Phase 1—allowing already submitted applications under Phase 1 to be approved under Phase 2, building on the high levels of consumer awareness about the Program, ensuring that the capacities developed for energy audits, designs, renovation works, etc. are maintained, and to help counteract the impacts to households from ongoing energy price increases. Should the government determine the need for a more comprehensive evaluation of Phase 1, this could be done in parallel to the launch of Phase 2, with any findings easily incorporated into the Phase 2 procedures and guidelines. Institutional Set-up As analyzed in Section 4, the proposed institutional set-up for Phase 2 would include a HF, IIs and HOAs along with the program administration and management functions. The main agencies and their respective roles would be as follows: • MRDPW would maintain responsibility for the overall program design, oversight, coordination and reporting. This would include the development and issuance of the program plan (i.e., the “Methodological Guidelinesâ€?), which describes the program’s objectives, eligibility criteria, procedures and institutional responsibilities. It is recommended that MRDPW establish a Program Steering Committee (PSC) (see next bullet) and a Program Coordination Unit (PCU) that would have day-to-day responsibilities for program coordination and oversight. • A PSC should be established to serve as a more formalized governance structure across various government and non-government entities, ensure proper coordination and help maintain political support for the program. It is proposed that the PSC be tasked to approve the program plan for each phase, adopt program procedures and guidelines, and endorse annual training/outreach plans developed by MRDPW. It is further proposed that the PSC be led by MRDPW and include central government entities (e.g., the Ministries of Finance, Energy, Environment and Water), other agencies (e.g., SEDA) and relevant non- governmental agencies (e.g., NAMRB, EcoEnergy, EnEffect, Bulgarian Construction Chamber, and academia). 31 • MOF would be responsible for elaborating the methodological guidance related to the budget and accounting and reporting aspects of the program, and issuance of the sovereign guarantee—in accordance with Article 100 of the State Budget Act (SBA) of 2015—in case international and foreign borrowing is required to fund Phase 2. • A Holding Fund (HF) would be selected and appointed to mobilize the financial resources for the implementation of Phase 2 and disburse funds in accordance with the Phase 2 program plan. As explained in Section 4, the HF would receive, screen and approve applications and channel program resources as defined in the program documents. The HF would maintain a public register of submitted applications, signed agreements, program disbursements and reflows and other parameters requested by MRDPW or the PSC. The HF would also act as a paying agent, remunerating contractors based on invoices approved by the IIs/municipalities/HOAs. (A comparison of existing financial institutions that could serve as the HF for Phase 3 is included in Annex 5.) However, unlike Phase 1, the HF would have the additional task of spot-checking technical documentation (e.g., audits and designs) to provide an additional level of quality control. It is also recommended that the HF be tasked with developing model audits for the main MAB typologies and posting these on their website to help improve the consistency and quality of the audits under the program; over time this may also help reduce audit costs. The HF would also receive and manage reflows from the reimbursable grant. • Implementing intermediaries (IIs) would be identified in the Phase 2 program documents. In the near term, municipalities may be the only viable option. Municipalities would continue to market the program to their constituents, help form and register HOAs, and assist in the submission of program applications to the HF. If there are suitable municipal entities (e.g., municipal maintenance company, communal services company, utility) or private entity (e.g., construction firm, facility management or maintenance company, ESCO), these entities could be assigned by the municipalities or HOAs directly to help prepare applications on behalf of HOAs, borrow on their behalf, assist with contractor procurement, oversee implementation, and collect monthly fees in order to repay the loan to the designated HF. • SEDA will maintain responsibility for collecting all energy audits developed under the program (ensuring conformity in accordance with the relevant legislation) and maintaining records in the national database of energy audits. • Other government agencies that have relevant functions related to the program should be represented on the PSC. For example, MOE is responsible for reporting energy savings under the NEEAP, and MOEW is tasked with monitoring and improving air quality (much of which is linked to residential heating). Program Eligibility Criteria and Procedures In general, the program eligibility criteria and procedures for Phase 2 would be consistent with Phase 1 with funding allocated on a first-come, first serve basis. However, a few adjustments are recommended to improve program oversight, coordination and M&E: â–ª Program marketing and outreach. MRDPW would initiate Phase 2 with a broad communication campaign, providing information to all relevant stakeholders on the design of Phase 2, key differences from Phase 1, and the need for HOAs to assume additional obligations—including regularizing monthly fees to cover the repayable grant (under the 32 program) and future maintenance and capital renovation costs. This outreach should also highlight the benefits of establishing HOAs, share the impacts and results of the MAB renovations under Phase 1, and promote additional public priorities with the program (e.g., support for underdeveloped regions, reconnections to DH systems, improved seismic and structural safety, improved air quality, promotion of RE systems). The options of appointing or establishing maintenance companies and other IIs should also be promoted. â–ª Registration of HOAs. As with Phase 1, MAB apartment owners would be required to establish and register HOAs to be eligible for Phase 2. Municipalities should continue to market the program and facilitate HOA registrations as before. Once HOAs are registered with the municipality, they will be eligible to submit applications through the municipality for the program. If possible, it is recommended that the threshold for HOA members agreeing to apply be reduced to 67 percent to make it easier to reach agreement. HOAs that have already registered and submitted applications under Phase 1 (about 3,275 applications) would not be required to submit new applications, but would need to submit updated minutes of the HOA General Assembly (with a 67 percent vote) to confirm their application validity given the introduction of the reimbursable grant obligation to all homeowners. In the applications, the HOA and municipality should specify whether an II will be appointed and who would assume responsibility for helping manage the renovation, collecting the monthly fees and repaying the reimbursable portion of the grant to the HF. The homeowners should designate an HOA representative who would be responsible for (a) reviewing and approving the energy and structural audit reports and technical design (in coordination with the municipality); (b) liaising with and supervising the renovation works; (c) signing the protocol for the contractor to initiate works and ensure accessibility of the site; (d) reviewing/approving acceptance reports; (e) participating in the final commissioning; and (f) attending relevant training activities developed by MRDPW for HOAs. â–ª Submission of applications. As under Phase 1, municipalities would be responsible for receiving applications from the HOAs. Applications should include minutes of the HOA’s General Assembly in which the members vote to implement the renovation program with a majority decision. The homeowners must understand and agree in the General Assembly meeting with no less than 67 percent of the votes that part of the investment cost must be repaid in the form of a repayable grant.28 â–ª Signing of delegation agreement. The HOA and II then enter into a delegation agreement. Under this agreement, the HOAs would authorize the II to act on behalf of the HOA to exercise the rights and assume all obligations for participation in the program. The agreement would be the same in format and content as the agreement under Phase 1; however, the II would sign on behalf of the municipality and it is proposed that, with the additional oversight of the HF and MRDPW, the District Governor be removed from this process. The agreement is then submitted to the HF together with the application package. â–ª Review and approval of applications. The municipality will then have to verify the application package, assess its completeness and confirm its eligibility for Phase 2. The applications are then submitted to the HF. The HF confirms the application’s completeness and eligibility and informs the municipality once it has been approved. The HF then issues a 28 While homeowners may agree to submit an application and repay part of the grant, they will not know at the application stage the exact amount of the investment, which measures are proposed, and what their monthly repayment obligation will be. Therefore, a second round of voting may be required after the design stage. 33 draft repayable grant agreement for signature. The HF would maintain a public register (i.e., program website) of submitted applications, their status and signed agreements. â–ª Technical (structural) audit, energy audit and passport. Once the HF signs the repayable grant agreement, the municipality informs the II and HOA that the technical assessment and energy audit can be initiated. The II then procures the required services competitively following the Public Procurement Act (PPA). As under Phase 1, the technical assessment would (a) assess the structural stability, including conformity with seismic safety requirements, and determine the need for rehabilitation; (b) provide instructions for the preparation of technical documentation according to eligible program investments; and (c) prepare the technical passport of the building. The energy audit will determine the baseline energy use of the MAB, develop a normalized baseline (assuming heating is in line with national norms), and identify the most cost-effective package of energy saving measures for the building to meet at least a “Class Câ€? energy performance. (The procurement of the technical assessment and energy audit can be combined in one contract, but the reports should be produced separately.) It is recommended that MRDPW develop model Terms of Reference, available on the program website, for IIs to use. While only a Class C is required, the energy audit should recommend all measures that are cost-effective (i.e., payback period under 10-12 years) and refer to appropriate building material standards to ensure consistency of quality. Where DH systems are available with adequate service quality, the energy audit must require the HOAs to connect or reconnect to the heating networks in order to be eligible for the grant. The II, municipality and HOA representative must all approve the audit reports/passport before approving the invoices for HF payment. The HF should also spot-check reports to ensure technical quality before approving payment. Thereafter, the HOA General Assembly will vote on whether to proceed with the detailed design and renovation works based on the recommended structural and energy efficiency measures and estimated investment costs, which would determine the estimated amount of repayment obligation of each homeowner. â–ª Detailed designs. The II would then procure a qualified design firm under the PPA to prepare the detailed technical designs for the MAB renovation based on the recommendations in the technical and energy audits, accompanied by a detailed bill of quantities (BoQ) and line item cost estimates. The II, municipality and HOA representative must approve the designs before approving the invoices for HF payment. The reference pricing currently in place should be maintained for the line item cost estimates. However, this should apply for the energy efficiency measures only. Structural improvements, heating upgrades, RE systems, etc. should not count within the reference price limits. â–ª Procurement renovation works, construction supervision, investor’s control. The II would then procure the construction firm and required supervisors following the PPA and construction regulations. If the II is managing the renovation of several MABs in one municipality, the II may consider bundling the renovations works in a single contract to obtain better pricing. The II would ensure the necessary MAB renovation permit is issued by the municipality before allowing the construction firm to proceed with the renovation works. The work plan of the construction firm should be discussed and agreed with the II and HOA. MRDPW may wish to explore the option of entering into framework contracts with material/equipment suppliers for commonly purchased items—such as windows, insulation, thermostatic radiator valves (TRVs), and heat meters—and allow construction firms bidding on these contracts to access these contracts at the reduced price. 34 â–ª Monitoring during construction. Construction supervision will be carried out by the selected contractor on behalf of the II. Verification of expenditures should be carried out by the II (or contracted experts on their behalf) to ensure that expenditures are actually incurred by the contractors and in line with national regulations/contract pricing and program parameters. The II must perform a 100 percent document check on expenditures. â–ª Commission certificate/Acceptance of works. The final acceptance of works must be organized by the II in concert with the municipality and relevant agencies (the central construction inspectors, fire department, utilities, district governor, etc.), the HOA and contractors. The various agencies all must sign-off that the building meets the relevant regulations (safety, fire, health) and construction codes, and the II and construction supervisor must verify that the renovation works were fully completed per the approved designs and that all equipment/material certificates are per specifications. â–ª Commissioning protocol. Based on the commissioning certificate, a completion protocol is signed by the II certifying fulfillment of all necessary requirements according to the program guidelines. This protocol is the basis for the final invoice payment by the HF. â–ª Ex-post energy performance certificate. While not required, the program should cover the costs of a post-renovation energy performance certificate to ensure the MAB is performing according to the expectations of the energy audit. This assessment will also be useful for collecting the MAB’s energy consumption data as an input into MRDPW’s building database system. For those MABs that show a variation in actual energy performance in comparison to the energy audit estimates, the audit report should document the identified deficiencies for submission to MRDPW, both to incorporate in future training curricula and for possible license revocation should it be determined that the deficiencies were the result of contractor negligence. To avoid potential conflicts of interest, the ex-post energy auditor should not be the same as the original energy auditor. â–ª Final payment determination. Once the commission and acceptance are completed, the II should document the final investment costs and develop a detailed repayment schedule to the HF. The II should determine the monthly cost to each homeowner and be responsible for collecting these payments each month. Should individual homeowners be delinquent on their payments, the II should assess a small penalty. Eligibility of Program Expenditure In addition to the expenditures for the preparation activities (e.g., technical and energy audits, technical design) and program management, outreach and capacity building activities (next section), the expenditures eligible for financing under the program consist of the following: (a) renovation works for structure rehabilitation/capital repair deemed mandatory in the technical assessment of the building; (b) implementation of all cost-effective energy efficiency measures recommended in the energy audit report; and (c) options to convert to cleaner heating systems, including reconnections to existing DH systems with acceptable service levels. These eligible expenditures related to the renovation works are consistent with those under Phase 1: • External building envelope elements: o Replacement of windows (windows, doors, glass-cases, etc.) o Thermal insulation of the building’s outer envelope (external walls, roofs, floors, etc.) • Systems for microclimate maintenance: 35 o Overhaul, modernization or replacement of local heat/boiler units or adjacent facilities belonging to individual homeowners, including fuel switching when associated with proven energy saving and positive environmental impacts o Installation of systems using RE sources to meet the energy demand of buildings o Repair or replacement of depreciated common parts of heating, cooling and ventilation systems of the building to enhance their energy efficiency o Modernization of the heating system (the design of the activities will be on a case-by- case basis) • Repair or replacement of the electrical system in the building’s common areas and installation of energy-efficient lighting in the common areas; • Replacement or modernization of the heating substation for automated control of heat supply in the building or staircase level (for MABs connected to DH); • Modernization or replacement of the building boiler and related equipment (for MABs not connected to DH); • Installation of a centralized control system for lighting or automated controls (e.g., occupancy sensors for lighting) in the common areas; • Gasification inside the building (installation of a gas boiler and connection to the gas distribution network, where available and within reasonable proximity to the MAB); • Measures to enhance the energy efficiency of elevators;29 and • Strengthening of the deteriorated building structures and elements, if needed as a prerequisite for implementation of the above-referenced energy efficiency measures. In addition to these eligible expenditures, a number of suggested eligible expenses are proposed for Phase 2. These include: 1. Support for cleaner fuels and RE systems. In order to address municipalities with poor air quality, the program should explicitly promote investments for cleaner fuels, heating systems and RE systems. These can include biomass boilers, efficient heating stoves, solar water heating, rooftop solar PV, geothermal heat pumps, etc. These would be supported in a ratio similar to that of the energy efficiency investments (i.e., 80 percent grant, 20 percent reimbursable grant). (No additional costs are assumed for this since this is already an eligible expense under the program.). 2. Targeted support to less-developed regions and municipalities. While the program should transition away from 100 percent grants, some regions may not have sufficient ability to pay the reimbursable grant portion. Therefore, MRDPW may wish to consider allocating additional subsidy levels to HOAs in less-developed regions and/or municipalities based on transparent, reliable and publicly available statistics. One option for this could be to group these municipalities into three categories—high, middle, and low income—and provide differentiated subsidy levels for each, thus not costing the program any additional funds. (The balance of financing would still come from reimbursable grants.) An example of how this could be done is illustrated in Table 5-1. 3. Low-income residents. Apartment owners who are considered poor, such as those who benefit from an energy subsidy, should be made eligible for a 100 percent subsidy for the investment. However, the rest of the HOA should continue to pay their share of the reimbursable grant. (This is assumed to be about BGN 8.1 million, based on an estimated 29 This would not include replacement of the elevator, but an improvement of its efficiency. 36 20 percent additional investment per MAB; this assumes about 60 percent of buildings with low-income residents at an average of 5 percent of low-income homeowners in each MAB.) Table 5-1: Example of Targeting Subsidy by Income Level (%) High-income Middle-income Low-income regions region region Average Central government subsidy 60 70 80 70 Municipal government subsidy 15 10 5 10 HOA 25 20 15 20 4. Commercial bank pilot. In order to begin engaging with commercial banks, MRDPW could allocate up to BGN 25 million of the program budget for a pilot with one or more interested commercial banks. These funds could be provided as an interest-free loan, partial guarantee (50 percent pari passu guarantee) to cover HOA defaults/late payments, bonuses or other to encourage banks to develop specialized financial products for HOA lending. For those banks that are able to lend, and for HOAs willing to borrow from commercial banks, the program could provide an additional 5 percent grant (i.e., an 85 percent grant with a lower 15 percent cofinancing requirement) with the cofinancing from commercial bank loans. The experiences of the pilot banks should be shared with all banks throughout Phase 2 so banks would be able to take on a greater role in future phases. 5. Pilot to support Class A and NZEBs. With the planned update to the EPBD in 2018, and the requirement for each Member State to establish a long-term renovation strategy to support the renovation of the national stock of buildings to support high energy efficiency and decarbonization to NZEBs, it is proposed the program include a pilot to promote NZEBs. The pilot would cover 80 percent of eligible expenses for up to 5 percent of MAB applicants under Phase 2 on a first-come, first-serve basis.30 (This is assumed to be about BGN 58 million, based on an estimated BGN 475,000 additional cost per MAB which would include upgrading of the heating system, biomass boiler, and additional building envelop measures.) Program outreach, coordination, capacity building and M&E. As noted in Section 3, a range of additional provisions should be made under the program budget to cover policy and regulatory work, outreach and training, coordination and M&E. During the second phase, some critical priorities would include: ➢ Strengthening the HOA legislation to further enhance HOAs’ legal status to open bank accounts, take loans, sign contracts and begin to introduce mandatory monthly fees and engage professional maintenance companies. Improve enforcement of the CMA. ➢ Initiate and promote apartment rental schemes for apartments where the owner does not reside within Bulgaria, or consider converting some unused apartments for social housing. ➢ Launch a public campaign to disseminate the results and impacts of Phase 1, promote Phase 2, and increase general awareness about the benefits of MAB renovations, HOAs and energy efficiency among homeowners. ➢ Support program implementing and management agencies through standard documents, training and capacity building. ➢ Develop and operationalize a consolidated M&E system, with a comprehensive set of program indicators, annual surveys, database of MABs, improved energy monitoring 30 If all 41,858 eligible MABs were renovated to NZEB, it would cost an estimated additional BGN 19.4 billion. 37 systems, and periodic program inspections and evaluations to capture and share lessons. This would allow all program participants to enter and extract data from a centralized system and monitor a broad range of indicators and targets. Program Cost and Subsidy As noted in Section 3, the target number of MABs to be renovated under Phase 2 (2019-2023) will be about 2,442. Preference will be given to those HOAs that have already applied for Phase 1 upon confirmation of their interest to proceed under the new financing modalities under Phase 2. As noted in Section 4, Phase 2 would provide full upfront financing for the renovation with a 20 percent reimbursable grant, to be paid for by the HOA from the energy cost savings over a period of 10 years. The total cost of Phase 2, broken down by component, is summarized in Table 5-2. A schematic of the proposed institutional and financial flows for Phase 2 is presented in Figure 5-1. The sources of funds for Phase 2 could be government budget, IFI borrowings, EU structural funds or reflows from Phase 1 of the program. Table 5-2. Breakdown of Program Costs for Phase 2 Component Number Total (BGN million) Subsidy amount (80% of BGN 554,000/MAB) 2,442 1,082.3 Reimbursable grant amount (20%)* 2,442 270.6 Suggested additional eligible expenses 100.0 Program outreach, coordination and M&E (5%) 60.5 Total 1,513.4 * The reimbursable grant amount must be allocated by MRDPW up front, but these funds will continue to be repaid and revolve over time. Figure 5-1. Proposed Financing and Implementation Schematic for Phase 2 38 Linking Phase 2 Design to Barriers and Phase 1 Lessons To confirm that the Phase 2 program design and future phases sufficiently addresses the prevailing market barriers identified and lessoned learned from Phase 1, as noted in Section 2, both were assessed alongside the recommended design elements and regional good practices. The results are summarized in Table 5-3. Table 5-3. Linkages of Barriers and Lessons to Design Elements Barriers and Global and regional good practices Recommended under Phase 2 lessons Barriers Inefficient price • Energy pricing reforms • Parallel energy pricing and DH signals and low EE • EE investment grants and subsidies reforms (p. 19-20) returns • Market aggregation • Investment subsidies (declining by • Outreach to share benefits of MAB phase) (p. 17-18) renovation programs (e.g., comfort, • Outreach efforts on program safety, properly value, energy benefits and results (p. 20) savings, etc.) Weak HOAs and • Strengthen HOA legislation • Enhanced HOA legislation, challenges with including obligations to set-up including easing voting thresholds investment decision- HOAs, collect monthly payments, for establishing HOAs and making and open bank accounts undertaking investments, borrowing • Reduced threshold for investment strengthening homeowner decisions obligations to make monthly • Requirements to open HOA bank maintenance payments (p. 19) accounts to facilitate savings and • Support HOA obligations to open facilitate lending bank accounts (routine maintenance • Support for maintenance companies and long-term capital renovations), sign contracts and take loans (p. 19) • Support the creation of professional maintenance companies (IIs) (p. 25, 32) High transaction • Development of national level • Continuation of national program costs and lack of program to introduce delivery and with a mix of government delivery financing mechanisms, develop (MRDPW, HF, municipalities) and mechanisms market for service providers nongovernment actors (IIs, service • Development of standard providers, banks) (p. 38) documentation (e.g., audits, • Development of standard documents designs, TORs, loan applications) to assist program participants (p. 20, • Support for HOA contractor 37) procurement • Investment subsidies (p. 17-18) • Introduce investment subsidies • Development of IIs (p. 25, 32) • Demonstrate ability for HOAs to • Introduction of repayable grant, repay loans commercial bank pilot to test and • Provide TA for technical oversight demonstrate HOA repayments (p. 33, 37) • Provision of TA to support program implementation and technical quality (p. 13, 37) 39 Lack of financial • Investment subsidies, particularly • Investment subsidies, proposed resources by for lower-income residents additional provisions for low- homeowners for EE • Parallel loan programs income homeowners and regions (p. investments • Concerns over shared investment 17-18, 36-37) contributions by other homeowners • Introduction of repayable grants (p. 33, 37) • Strengthening of HOA regulations to enforce payments from all homeowners (p. 19) Skepticism about • Requirements for building technical • Issuance of passports and energy levels of energy passports and energy performance performance certifications, savings certificates recommendation to allow ex-post • High quality energy audit reports energy performance testing (p. 34- • Dissemination of Phase 1 results to 35) other potential program participants • Increased technical oversight of • Integrated program M&E systems energy audits by HF (p. 32) • Development and implementation of M&E system (p. 20, 37) Lessons from Phase 1 Unrealistic • Development of medium- to long- • Government approval and expectations from term government strategy communication of long-term public on • Outreach on program goals, scope, program to renovate full building availability of grant support provisions to improve stock (p. 20) funds in perpetuity, public understanding and lack of predictability predictability in market among and clarity on long- service providers term government strategy Lack of sustainable • Market-oriented program designs, • Investment subsidies (declining by financing financing schemes and delivery phase) (p. 17-18) mechanisms mechanisms • Commercial bank pilot (p. 37) • Fostering partnerships with • Exploration of alternative funding commercial banks sources (p. 20) • Declining share of investment subsidy • Diversified funding sources Limited municipal • Development of standard • Provisions for TA, training and and HOA capacities documentation (e.g., audits, standardized documents and to implement designs, TORs, loan applications) templates (p. 20, 37) program, need for • Support for HOA contractor • Introduction and development of IIs technical oversight procurement (p. 25, 32) • Provide TA for technical oversight • Training and workshops Risks There are several risks associated with the final design, approval and launch of the second phase of the program. The biggest risk relates to the public acceptance of a future phase of the Program which does not offer 100 percent grant, as MRDPW did not communicate a long-term plan during 40 the initial phase or indicate a declining grant amount in outer years, leading to very high expectations under the Program. Therefore, the second phase must include information about the longer-term framework outlined in Section 3 and declining grant amounts in outer phases to incentivize HOA participation early. Substantial upfront consultations and outreach for the design of the second phase with (i) program stakeholders (municipalities, banks, HOAs, service providers) to gauge their willingness and ability to participate in the subsequent phase; and (ii) civil society to ensure strong public buy-in to government programming, would also help address this risk. Some consultations were done in the preparation of this report but more consultations and outreach will be needed to be conducted by MRDPW prior to the launch of the second phase. As the level of subsidy will decline in future phases, this risk will increase over time. Second, political and government buy-in to the long-term program will be essential to ensure the second and future phases are approved, properly resourced and supported by parallel and supporting institutions, policies and programs. Approval of long-term funding is particularly challenging given one-year budget cycles and shorter-term political administrations. Consultations between MRDPW and policymakers, key institutions (e.g., MOF, MOE, etc.) and others will be critical to understand their expectations from the program, motivating factors to support it and concerns. In addition, proper communication of program results (from Phase 1 and ongoing throughout future phases) to government entities and the public can help generate and maintain broad political support for the program across political parties and government administrations. Finally, there remains a concern that some municipalities, HOAs, etc. may be left out of the program due to issues of income levels, technical capacity, staffing, etc. The provision of municipal training, access to reference documents and materials, workshops, etc. along with specialized program provisions for low-income regions and HOAs can help better ensure broad participation, while concurrently helping to maintain broader support, for the program. 41 Annex 1. Data Analyses from Phase 1 Building Data from the SEDA Database of Energy Audits from Phase 1 of the Program The database prepared by SEDA contained 2,021 MABs with a total area of 10,992 million m2 and an average of 5,438.67 m2 of specific floor area per building. The forecasted energy savings and investment costs for the implemented energy saving measures in the buildings participated in the Program are presented below. As a result of implemented energy efficiency measures there was a significant improvement in the buildings’ energy performance class. Table A1-1 shows that, as a result of implementation of the Program, there were no buildings left in classes E, F and G. Instead, the vast majority—95 percent—became Class C, which was the minimum requirement of the Program. Table A1-1. Number of buildings in each energy performance class before and after implementation of the EE measures A B C D E F G Before EE measures 0 2 9 152 819 713 326 2 Before EE measures, total area in m 1,158 14,186 796,900 4,579,738 4,112,556 1,587,021 Before EE measures, av. area in m2 579 1,576 5,243 5,592 5,768 4,868 After EE measures 1 170 1,848 2 After EE measures, total area in m2 630 552,532 10,435,677 2,716 After EE measures, av. area in m2 630 3,250 5,647 1,358 The next three tables – A1-2, A1-3 and A1-4 – summarize the main building characteristics in terms of size, number, and energy performance class, as well as the total investment and anticipated energy savings resulting from the renovations. Table A1-2. Main parameters of the buildings participated in the Program All buildings All classes Number of buildings 2,021 2 Area of buildings, mil. m 10,992 Investment costs, mil. BGN 97,534 Annual savings, mil. BGN/year 118,459 Average payback period, years 8.2 Final energy savings, GWh/year 934,279 2 2 Final energy savings per m , kWh/m 85.00 Investment costs per saved kWh, BGN/kWh 1.04 42 Investment costs per m2, BGN/m2 88.57 CO2 emission reduction, thousand t/year 308,733 Investment costs per reduced CO2, BGN/tCO2 3,153 Table A1-3. Main specific parameters of the buildings by energy performance class to be achieved as a result of the Program Energy class after measures Energy class D Energy class C Energy class B Energy class A Number of buildings 2 1848 170 1 2 Area of buildings, thousand m 2.72 10,436 552.5 0.630 Investment costs, mil. BGN 0.193 935 38.3 0.074 Annual savings, mil. BGN/year 0.0147 113.1 5.37 0.015 Average payback period, years 13.1 8.3 7.1 5.0 Final energy savings, GWh/year 0.070 888 46.6 0.056 2 2 Final energy savings per m , kWh/m 25.60 85.05 84.27 89.53 Investment costs per saved kWh, BGN/kWh 2.77 1.05 0.82 1.30 2 2 Investment costs per m , BGN/m 70.95 89.59 69.39 116.68 CO2 emission reduction, thousand t/year 0.051 294.3 14.3 0.046 Investment costs per reduced CO2, BGN/tCO2 3,797 3,176 2,681 1,593 Table A1-4. Main specific parameters for the renovated buildings by building size Parameter buildings up to buildings from buildings of 4,000 m2 2,000 m2 2,000 to 4,000 m2 and more Number of buildings 236 490 1296 Area of buildings, thousand m2 294.6 1,589.3 9,107.7 Investment costs, mil. BGN 23.00 155.48 795.06 Annual savings, mil. BGN/year 3.09 18.29 97.07 Average payback period, years 7.4 8.5 8.2 Final energy savings, kWh/year 22.35 152.83 759.10 Final energy savings per m2, kWh/m2 75.85 96.16 83.35 Investment costs per saved kWh, BGN/kWh 1.03 1.02 1.05 Investment costs per m2, BGN/m2 78.07 97.83 87.30 43 CO2 emission reduction, thousand t/year 9.264 42.103 257.365 Investment costs per reduced CO2, BGN/tCO2 2,482.63 3,692.78 3,089.21 Table A1-5 and Figure A1-1 present the main findings from the energy efficiency measures based on the energy audit estimates. From the perspective of a household, the energy efficiency portion of the investment generally appears attractive in that it will yield energy savings, the monetized value of which is going to help repay a potential energy efficiency loan. Table A1-5. Main specific parameters for the renovated buildings, by type of measure Measures in Control and External wall insulation Windows replacement Measures in Building Measures in Lighting Management Devices Measures in Heating Measures in Boiler Floor insulation Roof Insulation Sub-Stations Installations Installations Set-ups Others RES Parameter Number of buildings 2,020 1,757 1,933 1,933 1,320 27 4 7 1 123 58 33 Area of buildings, mil. m2 10.98 9.63 10.55 10.97 7.44 0.16 0.027 0.045 0.004 0.81 0.31 0.21 Investment costs, mil. BGN 456.52 64.09 125.31 309.17 4.91 1.35 0.48 0.12 0.004 3.11 5.40 0.46 Annual savings, mil. BGN/year 63.26 7.85 1.13 33.76 0.71 0.20 0.037 0.023 0.0004 0.52 0.48 0.045 Average payback period, years 7.2 8.2 11.1 9.2 6.9 6.7 12.9 5.2 11.1 6.0 11.4 10.3 Final energy savings, GWh/year 501.05 61.58 87.66 267.13 2.97 0.88 0.26 0.24 0.002 5.60 3.64 0.25 Final energy savings per m2, kWh/m2 45.6 6.4 8.3 24.4 0.4 5.6 9.8 5.3 0.5 6.9 11.7 1.2 Investment costs per saved kWh, 0.91 1.04 1.43 1.16 1.65 1.54 1.82 0.50 2.34 0.56 1.48 1.85 BGN/kWh Investment costs per m2, BGN/m2 41.57 6.66 11.88 28.18 0.66 8.57 17.83 2.66 1.11 3.84 17.40 2.16 CO2 emission reduction, thousand t/year 161.76 19.46 29.91 89.95 2.43 0.46 0.13 0.08 0.002 1.81 1.67 0.19 Investment costs per reduced CO2, 2,822 3,294 4,190 3,437 2,023 2,959 3,670 1,551 2,204 1,718 3,238 2,428 BGN/tCO2 44 Figure A1-1. Average Costs of EE Measures for Phase 1 Number of buildings by EE measures types Investment costs per saved kWh energy by EE measures types 2.50 2500 2.00 2000 BGN/kWh 1500 1.50 1000 1.00 500 0.50 0 0.00 Average investment costs per saved kWh from all EE measures in all 2022 builidngs Investment costs per m2 by EE measures types Average payback period by EE measures types 45.00 14.0 40.00 12.0 35.00 10.0 30.00 8.0 BGN/m2 Years 25.00 20.00 6.0 15.00 4.0 10.00 2.0 5.00 0.00 0.0 Average payback period for all EE measures in all 2022 builidngs 45 Building Data from the BDB Database of Contractor Invoices from Phase 1 of the Program Tables A1-6, A1-7 and A1-8 (and Figure A1-2) present the main findings from the actual investment costs from BDB’s registry and compare the SEDA and BDB database figures. Table A1-6. Main specific parameters for the renovated buildings with status “completedâ€? in BDB registry* All buildings All measures Note Number of buildings 547 BDB DB + SEDA DB (IDs are equal) Area of buildings, mil. m2 2.833 SEDA DB Investment costs (amount paid), mil. BGN 542.01 BDB DB Investment costs according energy audit, mil. BGN 289.33 SEDA DB Annual savings in energy audit, mil. BGN/year 35.68 SEDA DB Average payback period, years 15.2 Calculated with investment by BDB DB Average payback period, years 8.1 Calculated with investment by SEDA DB Final energy savings, GWh/year 254.80 SEDA DB Final energy savings per m2, kWh/m2 89.95 Calculated Investment costs per saved kWh, BGN/kWh 2.13 Calculated with investment by BDB DB Investment costs per saved kWh, BGN/kWh 1.14 Calculated with investment by SEDA DB Investment costs per m2, BGN/m2 191.34 Calculated with investment by BDB DB Investment costs per m2, BGN/m2 102.14 Calculated with investment by SEDA DB CO2 emission reduction, thousand t/year 76.33 SEDA DB Investment costs per reduced CO2, BGN/tCO2 7,101.1 Calculated with investment by BDB DB Investment costs per reduced CO2, BGN/tCO2 3,790.6 Calculated with investment by SEDA DB Note: Investment costs from the SEDA database is for the implementation of the energy saving measures based on the estimates provided in the energy audits; Investment costs from the BDB registry is for all actual eligible costs paid, including structural investments. * This analysis has been done only for buildings for which the HOA ID numbers in the SEDA database and BDB registry are the same. 46 Table A1-7. Main parameters for the renovated buildings with status “completedâ€? in BDB registry by energy class All buildings Energy Energy Note class C class B Number of buildings 516 31 BDB DB + SEDA DB (IDs are equal) 2 Area of buildings, mil. m 2.701 0.132 SEDA DB Investment costs (amount paid), mil. BGN 517.257 24.749 BDB DB Investment costs according energy audit, mil. BGN 280.241 9.085 SEDA DB Annual savings in energy audit, mil. BGN/year 34.184 1.492 SEDA DB Average payback period, years 15.1 16.6 Calculated with investment by BDB DB Average payback period, years 8.2 6.1 Calculated with investment by SEDA DB Final energy savings, GWh/year 24.350 11.300 SEDA DB 2 2 Final energy savings per m , kWh/m 90.16 85.62 Calculated Investment costs per saved kWh, BGN/kWh 2.12 2.19 Calculated with investment by BDB DB Investment costs per saved kWh, BGN/kWh 1.15 0.80 Calculated with investment by SEDA DB 2 2 Investment costs per m , BGN/m 191.53 187.53 Calculated with investment by BDB DB 2 2 Investment costs per m , BGN/m 103.77 68.84 Calculated with investment by SEDA DB CO2 emission reduction, thousand t/year 73.290 3.037 SEDA DB Investment costs per reduced CO2, BGN/tCO2 7057.64 8148.82 Calculated with investment by BDB DB Investment costs per reduced CO2, BGN/tCO2 3823.71 2991.43 Calculated with investment by SEDA DB Table A1-8. Main specific parameters for the renovated buildings with status “completedâ€? in BDB registry by building size buildings buildings of buildings up All buildings 2 from 2000 to 4000 m2 and Note to 2000 m 4000 m2 more Number of buildings 26 168 353 BDB DB + SEDA DB (IDs are equal) 2 Area of buildings, mil. m 0.0293 0.562 2.241 SEDA DB Investment costs (amount paid), mil. BGN 4.933 108.651 428.423 BDB DB Investment costs according energy audit, mil. BGN 3.304 61.576 224.446 SEDA DB Annual savings in energy audit, mil. BGN/year 0.432 7.394 27.850 SEDA DB Av. payback period, years 11.4 14.7 15.4 Calculated with investment by BDB DB Av. payback period, years 7.7 8.3 8.1 Calculated with investment by SEDA DB 47 Final energy savings, GWh/year 2.911 54.261 197.629 SEDA DB Final energy savings per m2, kWh/m2 99.24 96.52 88.18 Calculated Investment costs per saved kWh, BGN/kWh 1.69 2.00 2.17 Calculated with investment by BDB DB Investment costs per saved kWh, BGN/kWh 1.14 1.13 1.14 Calculated with investment by SEDA DB Investment costs per m2, BGN/m2 168.18 193.27 191.17 Calculated with investment by BDB DB Investment costs per m2, BGN/m2 112.65 109.53 100.15 Calculated with investment by SEDA DB CO2 emission reduction, thousand t/year 1.349 14.916 60.062 SEDA DB Investment costs per reduced CO2, BGN/tCO2 3656.15 7284.26 7132.96 Calculated with investment by BDB DB Investment costs per reduced CO2, BGN/tCO2 2448.85 4128.27 3736.87 Calculated with investment by SEDA DB 48 Figure A1-2. Comparison of Investment Cost Data from BDB and SEDA Renovated buildings over 4000 m2 - investment costs Renovated buildings over 4000 m2 - investment costs from BDB DB from SEDA DB 20000 20000 18000 18000 y = -3E-10x2 + 0.0041x + 1775.5 y = 1E-09x 2 + 0.003x + 3896.3 16000 16000 R² = 0.4278 Total floor area ,m2 Total floor area ,m2 R² = 0.6836 14000 14000 12000 12000 10000 10000 8000 8000 6000 6000 4000 4000 2000 2000 0 0 0 1000000 2000000 3000000 4000000 5000000 6000000 0 500000 1000000 1500000 2000000 2500000 Investment costs, BGN Investment costs, BGN All renovated buildings - investment costs from BDB DB All renovated buildings - investment costs from SEDA DB 20000 20000 18000 18000 16000 16000 Total floor area ,m2 Total floor area ,m2 14000 14000 12000 12000 10000 10000 8000 8000 6000 y = 0.1279x 0.7691 6000 4000 R² = 0.8335 4000 y = 1.0445x 0.6451 R² = 0.6021 2000 2000 0 0 0 1000000 2000000 3000000 4000000 5000000 6000000 0 500000 1000000 1500000 2000000 2500000 Investment costs, BGN Investment costs, BGN 49 Annex 2. Regional Experiences of Thermo-Modernization Programs for Multiapartment Buildings This section presents examples from other Eastern European countries that illustrate various MAB thermo-modernization programs using financial instruments and/or blending financial instruments with grants. The purpose of these examples is to illustrate different types of mechanisms, in which due to the partial repayments of the investments revolving mechanism are established to develop more sustainable buildings thermo-modernization programs. Financial Mechanisms Example 1: Multi-Apartment Thermo-Modernization Model in Lithuania Lithuania launched its “Multi-apartment Buildings Renovation Programâ€? in 2009 with the support of the JESSICA Holding Fund. Its financing model involves a government subsidy of up to 30 percent (provided after a building’s thermo-modernization has been completed and the building has attained energy performance class “Câ€?) and financial instruments (i.e., soft loans) with a fixed 3 percent interest rate for the first five years from a Fund of Funds financial instrument. The loans are offered not only to the apartment owners, but also to municipal program administrators who act on behalf of and for the benefit of the apartment owners. The program has successfully accelerated the modernization process in Lithuania. Subsidy procedures for low-income persons have also been revised to facilitate the renovation decision- making process among apartment owners. Low-income persons who are entitled to receive heating subsidies are not required to repay the loan. However, if a low-income person refuses to vote in favor of a thermo-modernization investment, they can lose their heating subsidy from the state. This program implements Lithuania’s housing strategy, whose objective is to ensure effective use, maintenance, and modernization of housing and rational consumption of energy. The program’s achievements from January 2013 until May 2018 were as follows: • 3,214 buildings applications submitted to the Housing Energy Saving Agency (HESA); • 510 buildings in which thermo-modernization works are ongoing; and • 1,947 buildings that have already implemented thermo-modernization works. The program’s objectives until the end of 2020 are to reduce heat (fuel) consumption in renovated buildings by no less than 20 percent, to achieve annual heat savings of no less than 1,000 GWh, and to reduce CO2 annual emissions by no less than 230,000 tons. The total budget amounts more than €900 million. The sources of funding loans are: • EU Structural Funds from the European Regional Development Fund (ERDF), one of the EU Structural Funds under the Cohesion policy allocated to fund local infrastructure projects; • State budget resources; • Government securities—that is, green bonds issued by the stated and invested in the Fund of Funds; • Loans from IFIs; and • Contributions from commercial banks and other investors. 50 As shown in Figure A2-1, the project administrator (a municipal housing maintenance or other company appointed by the municipality) has a role as implementing intermediary acting on behalf and for the benefit of the apartment owners. Figure A2-1. Implementation Scheme for Lithuania Program Example 2: Thermo-modernization Fund in Poland The Thermo-modernization Fund, established by the Polish government in 1999, aimed to refurbishing the existing building stock in both public and residential buildings. The program was sponsored by the state-owned Bank of National Economy (BGK) and the Ministries of Finance and Infrastructure. The Fund is a nationwide initiative targeting housing cooperatives, housing communities, private individuals and local governments. Eligible investments had to meet certain technical and financial criteria, which had to be verified by an energy audit and financial analysis. The energy savings had to amount to at least 25 percent for a comprehensive building refurbishment. In the case of modernization investments of indoor heating or local heating systems as well as DH systems, the energy savings had to be at least 10 percent, and in the case of refurbishment of buildings constructed before 1961, the threshold was 10 percent. Individual projects were usually financed by a loan amount of up to 80 percent of the total project costs. Provided that the loan (plus interest) could be repaid within 10 years (the maximum term of the loan), the BGK could offer a grant bonus of up to 20 percent of the amount of the credit taken. Until mid-2002 the Thermo-modernization Fund was not very successful. This was mainly due to complicated application procedures (for housing cooperatives, for example) and high interest rates 51 (up to 30 percent). From 2003 on, after the conditions were relaxed and promotional activities were implemented, the number of applications increased significantly (Figure A2-2). Unfortunately, the Fund’s resources were not sufficient to meet this growing demand. In terms of applications, 40 percent came from HOAs, 40 percent from housing cooperatives, 7 percent from single-family homeowners, and 13 percent from others. By 2013, the program was operating well with a budget of about €37 million. While the program remains under implementation, no budget for incentives was allocated for 2014. Figure A2-2. Budgets and Applications for the Thermo-Modernization Fund, 1999–2013 Source: Rajkiewicz 2013. TPLZ = Polish zloty (PLN). Between 1999 and 2015, approximately 38,000 thermo-modernization incentives were awarded, which at the end of 2015 produced annual savings of energy costs of approximately PLN 900 million. From the beginning of the program until December 31, 2017, the fund received about PLN 2,324 million in subsidies.31 Poland also developed another program called the Thermal Modernization and Refurbishment Funding (Figure A2-3), which includes the following steps: 1. An application for a thermo-renovation grant is submitted, together with a loan application and a completed energy audit, by the “Thermal Retrofit Investorâ€? (i.e., a housing cooperative) to the Participating Bank, which evaluates the eligibility of the renovation loan. 2. The Participating Bank submits an application for a thermo-renovation grant to the BGK. 3. The BGK checks the energy audit and eligibility of the proposed investment measures and approves the grant. 4. The Participating Bank disburses the loan for the thermo-modernization works to the contractors for completed works. 5. The Thermal Retrofit Investor (housing cooperative) confirms completion of the construction works and submits an ex-post audit to the BGK via the Participating Bank. 6. The BGK checks the results and transfers (as a grant) up to 20 percent of the amount of credit taken by the Participating Bank. 31 For more information, see: https://www.bgk.pl. 52 Figure A2-3. Thermal Modernization and Refurbishment Funding, Poland Delivery Mechanism Example 3: Delivery Mechanism in the Slovak Republic — State Housing Development Fund The Slovak Republic’s State Housing Development Fund is designed for individuals, households and associations of apartment owners and can be used in the form of non-repayable grants or concessional loans to improve the thermal insulation of residential buildings and apartments. Applications are received in an ongoing basis, until all of the amount allocated in the annual budget is spent but not later than 31 December of the respective year. HOAs must provide co-financing of 20 percent of the eligible costs, as well as a signed declaration that the applicant is not bankrupt, has fulfilled obligations relating to the payment of social security contributions or the payment of taxes in accordance with the legal provisions of the country, and has fulfilled obligations relating to the payment of all loans or credits connected to the apartment building. Although the achieved energy saving is not monitored, the energy audit must show at least a 20 percent reduction of energy consumption for heating. The Fund receives funding from the EU and national co-financing resources allocated to the Integrated Regional Operational Program, which is managed by the Managing Authority, the Ministry of Agriculture and Rural Development of the Slovak Republic. The amount of EU funding is €29.5 million and the total amount of funds provided from the state and EU budget is €34.8 million. The Housing Development Fund manages the financial instruments—soft loans to improve the energy efficiency of residential homes through the complete renovation of apartment buildings. Eligible applicants for soft loans are owners of apartments and HOAs. Eligible measures include: 53 • Improving the thermal and technical conditions of building structures; • Insulation of roofs including the construction of a new sloping roof; • Insulation of facade walls and plinths; • Insulation of basement ceilings and partitions between flats and non-residential premises; • Replacement of windows, entrance doors and other openings in common areas; • Modernization of heating systems including piping and hydraulic regulation, installation of thermoregulation valves, installation of measurement and control systems for heat consumption; • Replacement or refurbishment of the heat transfer station or boiler room as well as hot water production systems; • Repairs or replacement of heating and hot water systems; • Replacement or repair of jointly-used technical building systems (sewerage, fire-fighting equipment, drinking water distribution, ventilation systems and gas distribution systems); • Repairs of lifts or their replacement and replacement by more energy efficient lifts; • Modernization of lighting; • Costs for the implementation of part of the project related to energy efficiency and renewable energy measures; • Modifications of residential buildings allowing access for disable persons; and • Related project documentation. Table A2-1 presents the main characteristics of the Fund, the implementation pace, and the soft loan conditions. Table A2-1. Slovak Republic State Housing Development Fund Example 4: Reconstruction Grant and Financial Instruments – Estonia The grant provided by the state-owned Credit and Export Guarantee Fund (KredEx) in Estonia is designed for associations and communities wishing to reconstruct their apartment buildings as 54 completely as possible. The grant may be combined with a renovation loan from KredEx, or from other commercial banks with a KredEx guarantee, to decrease the share of required own co- financing. The grant may be applied for in the amount of 15, 25 and 35 percent of the total project cost, depending on the level of integration in the reconstruction of the relevant apartment building. Eligible energy efficiency measures include: • Insulation of building envelope; • Replacement of windows and front doors; • Replacement or reconstruction of the heating system; • Reconstruction of the ventilation system or installation of a system with heat recovery; • Installation of equipment necessary for using renewable energy; • Reconstruction of the elevator control system; and • Design, project management and owner supervision. To apply for the grant, a relevant application must be submitted to the bank issuing the renovation loan. If an applicant has sufficient co-financing for the construction works and does not use the renovation loan, they can apply directly to KredEx for the grant. A prerequisite for applying for the grant is a completed energy audit and building design(s). The grant shall be paid upon the completion of all construction works. The main steps in the KredEx grant application process are as follows: 1. Housing association decision – simple majority 50 percent +1 in a General Assembly meeting 2. Selected qualified technical consultant – managing the preparation 3. Energy audit/EPC of the building and investigations 4. Detailed technical design: full set of building design documents 5. Building permit applied/issued 6. Credit decision from bank issued 7. Grant application to KredEx: 8. Evaluation of design documents by third party experts hired by KredEx 9. Funding decision by KredEx if all requirements met 10. Tendering with contractors 11. Construction (KredEx has special supervision rights) 12. Commissioning protocols of works completed 13. Grant payment by KredEx after act for works commissioning is signed 14. EPC based on measured use after one year of operation An apartment building loan guarantee can be provided for apartment buildings that wish to take a loan from a commercial bank to finance renovation and work connected with improving the quality of life of inhabitants, but whose risk is evaluated as higher than average by the bank (e.g. a high share of debtors, the apartment building is located in an area with low market value of apartments or in a mono-functional settlement, investment per square meter is markedly higher than the average), or who wishes to use the KredEx guarantee to insure the risk of re-payment difficulties. The main terms of the loan guarantee are as follows: • Up to 80 percent of the loan amount • The guarantee amount decreases proportionally to the loan amount 55 • Guarantee fee of 1.0-1.5 percent of the guarantee balance per year In the event of a payment difficulty, the loan recipient may submit an application to KredEx for temporary covering of payments by KredEx according to the payment schedule of the credit agreement. In the HOA, the administrator shall be involved in collection of repayments to the account from the apartment owners, and also in issuing of claims against apartment owners, if applicable. Results in 2010-2014 (previous system): • Grants - 38 million euros • Total investments – 135 million euros • 35 percent grant most popular (>50 percent in last years) • Renovated apartment buildings – 663 (of total of about 20 000 apartment buildings) • Renovated net area – 1.9 million m2 • Average energy savings per building – 43 percent • Total annual energy savings – 60 GWh 2015-2020 KredEx grants: • No need for state-loan (private banks have resources, well capitalized, low interest rates) • €102 million, grants of 15, 25 and 40 percent (50 percent for design, technical consultants, supervision) • More emphasis on preparation, ventilation, energy monitoring: more detailed building design documents (full energy calculation in addition to energy audit, because of third party verification); investigation of building design documents by third party experts (run by KredEx having contracts with qualified experts); technical consultants – commissioning protocols; agreements for post-maintenance – measured EPC after one full year of operation • Guarantees are still in force Example 5: Promotion of Energy Efficiency investment in residential sector – Russia Following the passage of the 2009 Energy Efficiency Law and subsequent bylaws and national programs, the Russian Federation has worked to reduce energy use in the housing sector. With assistance from the International Finance Corporation (IFC), the government undertook a series of legal and institutional reforms that provide homeowners with improved access to finance for EE renovations in MABs, including the 2013 Law on Capital Repairs. This Law obliged homeowners to make mandatory payments into a special savings account within a commercial bank which can only be used for capital/EE repairs, which provided a more predictable cash flow from which banks could secure their financing to MABs. In 2017, the government introduced financial incentives, from the federal budget, for homeowners of MABs to undertake EE investments with at least 10 percent energy savings. The level of subsidy depends on the socioeconomic status of a household (i.e., income level, number of working family members, number of children, disability, etc.) and can reach up to 50% of the monthly payments. IFC also provided institutional support to 20 banks that introduced such savings accounts and three of those banks have piloted loans for MAB renovations. market with savings and loan products— more than 20 banks introduced special (savings) accounts and three banks have piloted loans for MAB renovations. IFC worked with the three banks that piloted loans for EE financing to housing 56 MABs and, to date, facilitated more than US$95 million in EE investments in 335 MABs and single-family buildings, saving about 2,100 tCO2e of emissions. One main component that led to the results was the strong public campaign to increase the awareness of the homeowners about the potential for EE financing through local commercial banking partners through the implementation of about 81 seminars for more than 4,200 homeowners. Lessons Learned International experience shows that countries have chosen a variety of approaches, including financial instruments, for promoting EE in the residential sector. Several countries have seen significant outcomes using various mechanisms, so there is no preferred or optimal program model. In addition, countries have different views about the role of government in improving EE in private households. However, government interventions—either in the form of grants or financial instruments—were needed in all presented examples. Still, the review of global experience indicates a number of common elements from programs that have reported substantial impacts. Successful residential EE programs have had to overcome or at least mitigate most of the major barriers to EE, including the higher upfront costs. Financial incentives reduce either the upfront costs through grants or subsidies or support the investments themselves using soft loans or guarantees to minimize risk of commercial loans repayments. In the eastern EU member states (MS), investment costs relative to average household incomes are much higher than in the original EU11 countries, and most homeowners cannot afford to finance and repay the full investment costs of such measures. Therefore, the high level of financial support used in the eastern EU-MS must be high if buildings are to be refurbished to a tangible extent. Removing price distortions is another important challenge. Efficient DH systems can hardly survive in the longer run if retail gas prices for tariff customers are lower than for DH companies. Similarly, inefficient electric heating will be perpetuated if electricity prices continue to be subsidized. Therefore, in order for such programs to provide an attractive financial benefit to households, they must pay back within a reasonable timeframe—which may require rationalizing energy costs, as many of the case study countries have had to do. Delivery mechanisms can directly address certain barriers, such as a lack of HOAs. In Estonia, for example, the state-owned Credit and Export Guarantee Fund KredEx used to provide guarantees for loans made to apartment buildings for renovation purposes without a legal representative body. Implementing Intermediaries (municipalities, municipal companies), ESCOs and on-bill programs can address the problem of access to commercial bank financing by pre-financing the upfront costs. Energy Efficiency Funds can help to overcome the problem of lacking or insufficient knowledge on energy efficiency by providing TA. Institutional mechanisms will usually address very specific problems, which can be improved by following solutions: • A properly endowed Holding Fund or Energy Efficiency Agency will help to attract and manage program financial resources, supply information on EE measures, and motivate households to invest. These agencies can maintain central IT system for monitoring program progress and results, also can help organize TA programs—from training of HOA energy managers to standardizing EE measures to helping to certify and organize potential service companies and banks. 57 • An important prerequisite for achieving EE is the existence of strong HOAs or a good regulatory framework for apartment owners, which can take decisions on building maintenance and refurbishment based on majority decisions. However, HOAs under self- management rarely have professional specialists competent for project and contract management of thermo-modernization. As examples from many countries show, appointment of the Implementing Intermediary (i.e., a professional administrator in the form of a municipality, municipal company, or engineering company) can help to overcome this problem and increase the rate of the HOAs and apartment owners’ participation in the program. 58 Annex 3. Sample Documents Contents: • Sample energy audit and investment plan • Sample documents for HOA meetings 32 o Meeting invitation o List of participants o Meeting minutes • Sample loan agreement33 32 Source for the sample energy audit and HOA documents, along with other templates from the program in Lithuania, can be found at: http://atnaujinkbusta.lt/teisine-baze/#page-anchor-1733. 33 Source for the sample loan agreement can be found here: https://www.sb.lt/file/failai/?fl=122&lng=en. 59 Energy Audit and Investment Plan MULTI-APARTMENT BUILDING..............(address).................. THERMO-MODERNIZATION PROJECT (Date) EA prepared by: ............................................................. (Energy auditor’s name, surname, qualification certificate No., signature) Homeowners association:.................................................................................... (HOA name (No.), address, chairman name, surname, signature) Contract data for the EA preparation: ................................................................... (Name of the contracting authority, the contract date and number, contract amount in BGN) Approved by …………… or its authorized representative: ........................................................................................................ (position, name, surname, signature, date) 60 I. EXPLANATORY TEXT (The explanatory note describes the preparation of the energy audit and justification for the selection of the package of EE measures. It should also provide other important information regarding the baseline energy usage and any adjustments made for underheating (i.e., normative baseline), proposed solutions, project implementation and financing plan, etc.) II. TECHNICAL ECONOMICAL DATA AND SOLUTIONS 1. General Building Characteristics No Name Units. Number. Remarks 1 2 3 4 5 1.1 Year of construction 1.2 Typical project, serial No (if available) Number of floors 1.3 Number of entrances 1.4 Number of apartments/premises 1.4.1 Residential 1.4.2 Commercial 1.5 Total floor area: m2 1.5.1 Residential area m2 1.5.2 Commercial area m2 1.6 Total heated area m2 1.6.1 Residential area m2 1.6.2 Commercial area m2 1.7 Heated volume m3 1.7.1 Residential volume m3 1.7.2 Commercial volume m3 2. Main Technical Data of the Building Envelope Structure (material, description of the element status, defects, deformations, level of deterioration, etc.) and No Name Unit Number mark of evaluation* 1 2 3 4 5 2.1. Walls (please indicate construction) 2.1.1. exterior wall area m2 2.1.2. external wall heat transfer coefficient W/m2K** 2.1.3. plinth area m2 2.1.4. plinth heat transfer coefficient W/m2K 2.2. Roof (please indicate construction) 61 2.2.1. area of roof cover m2 2.2.2. Roof or floor attic heat transfer coefficient W/m2K 2.3. Windows and balconies, doors in apartments and other premises 2.3.1. Number of windows: шт. Number of window, changed to a lower heat 2.3.1.1. шт. transfer windows 2.3.2. Area of windows: m2 Area of windows, changed to a lower heat transfer 2 2.3.2.1. m windows Area of windows, changed to a lower heat transfer 2 2.3.2.1. m windows Heat transfer coefficient of windows, changed to a 2.3.3. W/m2K lower heat transfer windows 2.3.4. Number of balconies doors: Number of balconies doors changed to a lower 2.3.4.1 heat transfer doors Heat transfer coefficient of balconies doors 2.3.5 W/m2K changed to a lower heat transfer doors 2.3.6. Area of balconies doors: m2 Area of balconies doors, changed to a lower heat 2.3.6.1 m2 transfer doors Windows and doors in common areas of the 2.4. building (staircases, basement, entrance door) 2.4.1. Number of windows: No. Number of windows, changed to a lower heat 2.4.1.1. No. transfer windows 2.4.2 Area of windows: m2 Area of windows, changed to a lower heat transfer 2 2.4.2.1. m. windows Heat transfer coefficient of windows changed to a 2.4.3 W/m2K lower heat transfer doors 2.4.4. Number of entrance doors No. 2.4.5. Area of entrance doors m2 2.4.5 Entrance doors heat transfer coefficient W/m2K 2.5 Basement 2.5.1. Area of basement floor m2 2.5.2. Basement floor heat transfer coefficient W/m2K 2.6. Foundation 2.7. Supporting constructions of balconies and loggia 2.8. Common electrical and lightening equipment 2.9. Lifts (if they are) 2.10. Other 62 * Mark of evaluation: 4 – good condition; 3 – satisfactory condition; 2 – poor condition (in the coming year should be renovated); 1 – very bad condition (urgent need to renovate or change an element immediately – there is a danger to human life or risk of potentially serious economic losses due to additional building violations). ** W/m2K = Watts per square meter kelvin. 3. Main Data of the Engineering System Name Information 1 2 3 3.1 Heating system 3.1.1 Type of heating 3.1.2 Temperature gradient 3.1.3 Heating sub-station 3.1.4 Description of external network 3.1.5 Common tubes inside the building 3.1.6 Type of used heating bodies 3.1.7 Regulation of heating system 3.1.8 Metering devices Appropriateness / sufficiency of heating 3.1.9 (occupants’ view – under heated or overheated) 3.2 Domestic hot water supply 3.2.1 Type of hot water preparation 3.2.1 Main consumers 3.2.1 Max/min. temperature during peak consumption 3.2.1 Hot water measurement and invoice procedure 3.2.1 Placement of internal distribution pipes in the building from input into building to outlet 3.2.1 Requirements on tube insulation materials 3.2.1 Circulation of hot water 3.2.1 Appropriateness / sufficiency of DHW supply (occupants’ view) Air conditioning/ Ventilation/ Air- 3.3 cooling 3.3.1 3.3.2 3.3.3 3.3.4 3.3.5 3.3.6 4. Еnergy Need/Use/Consumption Unit of No. Indicator measurement No. Of units 1 2 3 4 Total annual energy consumption (according to the energy kWh/year 4.1 performance certificate data): kWh/m2/year 63 kWh/year 4.1.1 Heating kWh/m2/year kWh/year 4.1.2 Hot water kWh/m2/year kWh/year 4.1.3 Air conditioning/ Ventilation/ Air-cooling kWh/m2/year 4.2. Energy class according to EPC (if available) class 4.3 Total annual energy consumption (metered) kWh/year 4.3.1 Heating kWh/m2/year kWh/year 4.3.2 hot water kWh/m2/year kWh/year 4.3.3 Air conditioning/ventilation/Ñ?ooling kWh/m2/year 4.5 Duration of the heating period days 4.6 Average temperature during the heating period 0 С 4.7 Explanation of Deviation b/w EPC consumption and metered kWh/year 4.8 Energy consumption baseline kWh/m2/year kWh/year 4.8.1 Heating kWh/m2/year kWh/year 4.8.2 Hot water kWh/m2/year kWh/year 4.8.3 Air conditioning/ Ventilation/ Сooling kWh/m2/year 5. Building Thermo-Modernization Measures Technical energy indicators of the measures Short description of the measure, with indication of technical (technological) Heat transfer solutions, some coefficient, U characteristics of (W/m2K) and /or Scope of works No. Name of measure equipment and etc. other indicators * (m2, m, No.) 1 2 3 4 5 5.1. Energy efficiency measure 5.1.1. 5.1.2. 5.1.3. ... 5.2 Other eligible measures 5.2.1. 5.2.2 ... 6. Energy Performance Improvement after Implementation of the Energy Efficiency Measures 64 (Estimated energy consumption must be calculated according to the …[date]… methodological recommendations) Unit of No. Of Units No Indicator measurement Current situation planned 1 2 3 4 5 INDICATORS OF PROJECT 6.1. Energy performance class class kWh/year 6.2. Energy consumption baseline kWh/m2/year kWh/year 6.2.1 Heating kWh/m2/year kWh/year 6.2.2 Hot water kWh/m2/year Air conditioning/ Ventilation/ kWh/year 6.2.3 Сooling kWh/m2/year 6.3.1. Windows replacement, 6.3.2. Insulation of external walls, 6.3.3. etc. 6.4. Decreasing of estimated energy consumption for a heat % -- comparing to the current situation 6.5. Estimated heat capacity for kW building heating needs PH 6.6 Reduction of CO2 emissions tons/year -- 7. Preliminary Key Technical and Economic Indicators of Measures Saving Preliminary Percentage of Payback period Cost Investment grant Energy, (BGN Costs (BGN reimbursement Without With No. Name of Measure kWh/year 000/year) 000/year) (%) grant grant 1 2 3 4 5 6 7 8 7.1. Implementation of energy efficiency measures: 7.1.1. Modernization of heating system 7.1.2. Insulation of external walls 7.1.3. Windows replacement in common areas, and etc. 7.2. Implementation of other measures: 7.2.1. Replacement of cold water pipes 65 7.2.2. Replacement of sewage system And etc... Total: 8. Project Preparation and Implementation of Cost Summary Cost of installation and Cost of materials and construction works Total cost No. Name of Measure equipment (BGN) (BGN) (BGN) 1 2 3 4 5 8.1. Implementation of energy efficiency measures: 8.1.1 Modernization of heating system 8.2. Insulation of external walls 8.3. Windows replacement in common areas, and etc. etc. 8.4 Total: 8.5 Design preparation cost (BGN) 8.6 Technical supervision of works (BGN) 8.7 Cost of project implementation administration (BGN) 8.8 Cost for the preparation of the Energy Audit Total: 9. Investment Cost-Benefit Assessment No. Indicators Unit of Value of the Comments measurement indicator 1 2 3 4 5 9.1. Simple payback period of the investments: 9.1.1. Based on the total investment Years 9.2. Minus ......... grant Years 9.3. Simple payback period of energy efficiency investments: 9.3.1. Based on the total investments into EE measures Years 9.3.2. Minus ......... grant Years Investment cost-benefit assessment results could be graphically illustrated by showing the relative thermal energy changes before and after the project 10. Project Implementation Plan No Name of measure implemented by the project Starting date Finalizing date Comments (month, year) (month, year) 10.1 Windows replacement 10.2 Insulation of roof 10.3 External walls insulation 10.4 and etc. 66 11. Project Financial Plan No Financial sources Planned sources Comments Total, Percentage out of all thous. BGN sum % 1 2 3 4 5 11.1. Planned financial sources for a project preparation and implementation 11.1.1 Own funds of HOA 11.1.2 Repayable grant or other financial sources 11.1.3 The ......... grant for reimbursement of expenditures for the EA/ IP preparation, design, technical supervision and/or administration and implementation of the EE measures etc. 11.1.4. Other possible grants (local municipalities or other possible grants) Total amount: 100% 11.2. The ......... grant breakdown: 11.2.1. Estimated ......... Grant amount for reimbursement of the energy efficiency expenditures in BGN: 11.2.2. Estimated ......... Grant for the design and Technical supervision of works in BGN: 11.2.3. Grant amount for the reimbursement of the EA preparation expenditures in BGN: 12. The Preliminary Allocation of Investments to Owners of Apartments and Other Premises No. No of Area of Amount of Grant, Amou Amount Preliminar comme apartment premise investment BGN nt of of the y monthly nts or other s, m2 (BGN) invest repayable repayable premise comm indivi Total For a EA, For the ment grant, grant on dual design + investme minus BGN repayment technical nts into Grant, amount supervisio energy BGN BGN/m2 n of works efficienc (6-7) y measure s 1 2 3 4 5 6 7 8 9 10 11 12 12.1 Apartment No. 1 67 Apartment 2 and etc. Total: 13. The Cost of Energy, 2018 Name Unit of measurement Value of the indicator 13.1 Natural gas BGN/m3 13.2 Electricity BGN / kWh 13.4 District Heating BGN / kWh 14. Preliminary terms of the repayable grant repayment _____________years or in months. 68 Sample documents dealing with HOA meeting organization and decision making to implement thermo-modernization project Invitation to the meeting of owners of apartments and other premises, to discuss the implementation of energy efficiency measures proposed by the Energy Audit and Investment Plan (EA/ IP) ______________________________________________(name of the HOA organizing the meeting, address of its registered office or place of business, telephone number, website address (if any), ________________________________________ (date, time and place of the meeting (address); Meeting Agenda: 1. Choice of multi-apartment building thermo-modernization option (if EA/ IP provides few options for thermo-modernization). 2. Approval of the EA/ IP document and approval of the project implementation conditions. 3. Selection and approval of implementing intermediary. ________________________________________(the place or website or other method, date and time when the owners of the apartments and other premises can access additional information and documents (if any) justifying the draft decisions of the issues on the agenda of the meeting if they are not presented with the invitation of the meeting); ________________________________________(address, email address or other description, the date and time when the owners of the apartments and other premises can submit their proposals, questions, opinions or information on the agenda of the meeting); Informing you that: 1. Your personal data (name, surname, personal code, address, solvency and execution of financial obligations) will be transferred and processed by the bank _________ (code _________, registered office address _________). Financing agencies may collect specified data and data on their place of residence, solvency and fulfillment of obligations by accepting them in acceptable forms and from the administrator of the apartment house (manager of common use objects). 2. Residents entitled to reimbursement of heating costs (low income families) are familiarized with the Bulgarian legislation regulating state support for the implementation of investment measures to increase the energy efficiency of a multi-apartment building. Notes: 1. The meeting of owners of apartments and other premises shall be announced not later than two weeks (14 calendar days) before the day of the meeting. ______________ 69 List of Participants MULTI-APARTMENT BUILDING _______________________________________________________________________________ (address) LIST OF PARTICIPANTS FOR THE _____[date]____________MEETING OF OWNERS OF THE APARTMENTS AND OTHER PREMISES No Meeting participants or Meeting participants Owners of the Signature of Remarks his/her power of identification document, apartments or other the Meeting attorney first name, last number, date issued or premises participant name or company/institution identification number company/institution number and its representative first name, last name, (owner's authorized position power of attorney registration number and date) 1 2 3 4 5 6 ENCLOSED. Power of Attorney (if any) copy/copies, _____ page/pages. Chairman of the Meeting ____________ ______________________ (signature) (first name, last name) Meeting Secretary ____________ ______________________ (signature) (first name, last name) _________________________________________ 70 Meeting Minutes (Draft) General meeting of HOA (apartment owners) ________________________________________, (address) 20___ __________ ___ No. ___ I. GENERAL INFORMATION Multi apartment building, __________, unique no. ________________________________ , (Address) Homeowner’s association ______________, identification code of enterprise _________, (name of HOA) address of HOA location_____________________. Number of apartments and other premises: __________. Number of owners of apartments and other premises: __________. II. PARTICIPANTS In the meeting of the owners of apartments and other premises (hereinafter - the owners of the premises) (hereinafter referred to as the meeting) took part 1) ______________(__________) (owners of premises), having ______________________________ (in numbers) (in words) (in numbers) (__________) voices, and it is _________________________ (_______) % all of the housing owners. (in words) (in numbers) (in words) Quorum is/ is not according to the_______________ of Bulgaria , and the meeting is deemed to have occurred / failed. (select one possible) 2) Other persons participating at the meeting: ____________________________________________ . (first name, last name, who represents) The list of participants of the apartments and other premises owners is attached. III. ANNOUNCEMENT OF THE MEETING Announcement of the meeting of apartments and other owners of the premises, when making a decision regarding the thermo-modernization of the building (enclosed) 20___ __________ ___ d. published by means of information provided by the announcement of the convening of the meeting of apartments and other premises, the agenda and decisions passed based on the legal act of BULGARIA regulating announcements of meetings. The owners of the premises were given access to the energy audit of the renewal of the multifamily building and the planned preliminary allocation of investments to individual apartment owners. (An exemplary form for announcement a meeting of apartments and other premises owners on the decision for thermo-modernization their building is attached) 71 IV. ELECTION OF CHAIRMAN OF THE MEETING AND SECRETARY Chairman of HOA proposed to elect chairman of the meeting and secretary of the meeting by the simple majority of the owners of the premises taking part in the meeting. CONSIDERED: The chairman of the meeting was proposed to be elected __________ __________. The secretary of the meeting was proposed to be elected __________ __________. VOTED: „For“ „against“ For chairman of the meeting For secretary of the meeting DECIDED: Chairman of the meeting elected ____________________, (first name, last name) Secretary of the meeting elected ____________________. (first name, last name) V. MEETING AGENDA AND DECISIONS Chairman of the meeting introducing agenda: 1. The option on thermo-modernization package selection (if few different packages are presented in EA/ IP document). 2. On the terms and conditions for the implementation of the thermo-modernization based on EA/ IP document. VOITED: “Forâ€? “Against“ DECIDED: To approve the proposed meeting agenda CONSIDERED: 1. On the choice of the option (package) for the thermo-modernization of multifamily building (if an optional thermo-modernization project is presented for discussion at the meeting). PROPOSED DECISION: Select one of the option (package) foreseen by the EA/ IP VOITED: 72 Package „For“ 1. 2. .. (Option selected for the most votes for "For") DECIDED: For the multi apartment building thermo-modernization selected option (package) __________ 2. Regarding to the thermo-modernization of the multi apartment building, the EA/ IP approval (according to the chosen option) and the technical project for the thermo-modernization preparation and thermo-modernization project implementation. PROPOSED DECISION: Approve EA/ IP with identified package of thermo-modernization and to determine: 1) maximum amount of investment should not exceed __________________________(__________) BGN, (in numbers, in words) of it repayable amount _____________________________(___________) BGN; (in numbers, in words) 2) All costs (investments) related to the implementation of the multi apartment building thermo- modernization project minus the …… grant must be paid by the owners of the apartments and owners of other premises. When allocating funds to owners of apartments and other premises, gross investment is assessed, which is distributed in proportion to the share of the common property (the ratio of the useful floor area of the apartment or the total area of other premises and the total floor area of the house), and individual investments (for the change of the apartment or other premises windows, radiators, glasing the balconies, etc.); 3) The organization and administration of the multi apartment building thermo-modernization project and / or its implementation and / or financing, in accordance with the approved EA/ IP, is entrusted _________________________________ (specify to whom, first name, last name, position if any) (Further – Project administrator). The Project administrator must provide to the apartment owners and other premises owners with information related to the implementation of the renewal project when they apply in writing or by electronic mail - to reply in writing or by e-mail not later than within 10 days from the date of receipt of the request. 4) The Project administrator shall, on behalf of the owners of the premises, conclude a repayable grant agreement with …………… for a maximum amount of _______BGN for a maximum period of _____________ months, for the preparation and implementation of thermo-modernization of the multi apartment building, to apply for a grant to the ….. administered program, and shall inform the owners of apartments and owners of other premises with the essential terms of the loan agreement Terms, the amount of contributions, the procedure for their repayment. The Project Administrator must make sure, before signing the repayable grant agreement, that the agreement includes a condition and possibility for the repayable grant taken on behalf of the owners of apartments and owners of other premises, at the request of the owners of apartments and owners of other premises, to repay him or a part thereof earlier than the 73 established deadline without applying an early repayment costs – is it possible, should be decided after some negotiation with the financing institution; 5)* The project implementation administration fee is paid for the period of the project implementation _________ months, using the project renewal fee for the project administration tax rate ____________ BGN / sq. m. / month (excluding/ including VAT). From the day when the administration fee for the thermo-modernization of the multi apartment building is completed, a repayable grant administration fee of _________ BGN / sq. m./month (excluding/ including VAT)is payable to the date of repayment of the repayable grant. * if it will be decided to use 6) The owners of apartments and owners of other premises benefiting from a grant for the implementation of the project will have to pay each month a portion of repayable grant according to the repayable grant repayment schedule established in the repayable grant agreement in accordance with the procedure specified by the Project Administrator; 7) The owners apartments and owners of other premises, when transferring the premises to another person, must inform the purchaser (the acquirer) about the premises owner's liabilities and debts related to the implementation of the project, and grant repayments. If there are debts at the time of transfer - the premises owners must pay them until the transfer of premises, and the obligations to transfer to the buyer of the apartment or other premises are to be fulfilled. The owner of the premises must inform the Project Administrator about the transfer of premises. VOITED: „approving“ „disapproving“ „abstinent“ DECIDED: To approve or disagree with the proposed solution. 8) An repayable grant agreement on the thermo-modernization project implementation should be concluded with _________________________________________________________________. (name of the financial institution) VI. Added: 1. List of participants in the meeting of apartments and other premises owners 2. Announcement on the meeting of apartment and other premises owners regarding the decision on thermo- modernization of multi-apartment building 3. Nominee ballot (voting) papers 4. Copy of EA/ IP for multi-apartment building thermo-modernization. Chairman of the meeting ______________________________________________________________ (signature) (first name, last name) Secretary of the meeting ______________________________________________________________ (signature) (first name, last name) 74 Sample outreach materials developed in other countries: ✓ Building modernization program in Lithuania: http://atnaujinkbusta.lt/# ✓ Thermal Modernization and Renovation Fund of Poland: https://www.bgk.pl/samorzady/fundusze-i-programy/fundusz-termomodernizacji-i- remontow/ ✓ State Fund for Housing Development of Slovakia: https://www.sfrb.sk/ ✓ Financial solutions for apartment buildings for increasing of energy efficiency in Estonia: http://www.kredex.ee/en/apartment-association/ ✓ IFC - Planning, Organization and Financing of EE Measures in Multi-apartment Buildings in Russia: http://fondgkh.ru/wp-content/uploads/2018/05/Prezentatsiya_Minyaev-IE_31- 05-2018.pdf ✓ IFC – Energy Audit of Multi-apartment Buildings in Russia: https://www.reformagkh.ru/misc/credit/ЭнергетичеÑ?кое%20обÑ?ледование%20МКД.pd f 75 Annex 4. Details of Phase 1 of the Program Eligibility of the candidates The home owners living in an eligible building have to register a HOA regardless of the number of entries in it. The selected management board acts on behalf of all owners in the block section or in the building. The establishment and the registration of the HOA is carried out in accordance with Condominium Ownership Management Act (COMA). In the agreement between the home owners should be stated that the purpose for the establishment of the HOA is “For the adoption of EU funds and/or state or municipal budgets, grants and subsidies and/or use of own funds for repair and renovation of multifamily residential buildingsâ€? as stated in Article 25 of the COMA. The agreement should be signed by owners representing at least a 67 percent share of the common areas of the building / block section. The HOA should be established to act for an indefinite period of time such that it can be terminated by a decision of the General Assembly (GA) following the expiry of the guarantee for the construction works—but not sooner than five years after the commissioning of the activities under the Program, which date should be stated in the Agreement. The Agreement should also specify that an individual homeowner may not terminate his/her membership in the HOA when the MAB has an approved MAB renovation project whether supported by EU funds, state or municipal budgets, grants and subsidies, or the HOA’s own funding. After the HOA is established, it must be registered in the municipality no more than 14 days following the GA. Municipal authorities should enter the HOA into a public register and issue the HOA’s certificate of registration. The HOAs should be also registered in the Registry Agency and an official BULSTAT number will also be issued. Energy efficiency requirements According to the Methodological Guidelines, the National Program will finance the most cost- effective package of energy saving measures (ESMs) for the building such that it achieves Class C energy performance in accordance with Ordinance No. 7, “Energy Efficiency in Buildings.â€? Buildings are evaluated in terms of their EE—that is, the value of their integrated energy performance, which represents the calculated consumption of primary energy per square meter. The conditions for the level of temperature comfort in the building must comply with the normative requirements at standard outdoor climate conditions. The scale of energy classes for residential buildings is presented in Figure A4-1. 76 Figure A4-1. Sample energy performance in building label for Bulgaria Energy EPmin, EPmax, RESIDENTIAL BUILDINGS class kWh/m2 kWh/m3 A+ < 48 A+ A 48 95 A B 96 190 B C 191 240 C D 241 290 D E 291 363 E F 364 435 F G > 435 G Source: Based on Ordinance No. 7 for energy efficiency in buildings. In MRDPW’s guidelines on the implementation of the regulatory framework for EE of buildings, it is stated that the minimal requirement for existing buildings commissioned before 1 February 2010 is to achieve energy class “Сâ€?. This can be done using different combinations of ESMs for improving the energy performance of the building envelope components and systems to maintain the indoor climate. A specific requirement is introduced for the U-values of the different components of the building envelope, which must not exceed by more than 10 percent the reference values presented in Ordinance No. 7 for energy efficiency in buildings. In a letter from Mr. Nikolay Nankov, Deputy Minister of Regional Development and Public Works, to Mr. Emil Ivanov, Mayor of the Municipality of Svoge, published on the MRDPW website, it is mentioned that the condition for the EE requirements presented in the Program’s Methodological Guidelines do not limit packages of ESMs for a higher energy class to be recommended. Stakeholders and Their Functions The chosen scheme of decentralized management and implementation of the Program requires the involvement of multiple stakeholders implementing different functions. General management and control on the implementation of the Program is provided by the Ministry of Finance (MoF), which is responsible for methodological guidance in relation to the budgetary aspects of the Program and for issuing of state guarantees for the loans; and by the Ministry of Regional Development and Public Works (MRDPW), which is responsible for coordination, issuing the methodological guidelines, and maintaining a registry for the current status of technical and financial implementation of the projects. MRDPW has included the Program in the state budget and in the medium-term budgetary forecast. There are several relevant Controlling Bodies within the Program. As an institution representing the State, the Regional Government inspects the eligibility of the HOAs and the buildings within its territory and signs the tripartite agreements with the Bulgarian Development Bank (BDB) and the municipality for the funding of the projects. Later it controls all documentation related to the implemented works presented by the municipalities and signs annexes to the tripartite framework contracts related to advance, interim and final payments. The Sustainable Energy Development 77 Agency (SEDA) controls the energy audits sent by the municipalities (returning the audits for correction, if necessary) and keeps the records in the national registry of energy audits. Other indirectly involved controlling bodies are the Registry Agency, which inspects the documentation for the establishment of the HOA and officially registers the HOA by issuing a BULSTAT number; and the Public Procurement Agency (PPA), which reviews and approves the documentation for the public procurement procedures organized by the municipalities. The role of the Holding Fund for the Program is executed by the BDB. The Bank is involved in negotiations of the agreements with IFIs to provide the financial resources for the Program with the necessary sovereign guarantee issued by the state. BDB prepares the tripartite target financing agreements and annexes for funding of the activities related to the various building renovation projects. BDB also keeps a public registry of the submitted requests for contracts and for the signed contracts as well as for the amounts paid. Finally, BDB negotiates with other financing institutions to mobilize financial resources for the Program. The municipalities have the role of implementing intermediary. They are responsible for the overall organization and control of the implementation of all activities related to the renovation of the buildings. Municipalities inform and consult the citizens about the Program and the conditions for participation, helping them prepare the documentation necessary to register HOAs. The municipality approves the requests for participation in the Program, and the Mayor signs contracts for the implementation of the renovation project with the chairpersons of the HOAs. With this contract, the HOA gives a mandate to the municipality (represented by the Mayor) to perform actions on behalf of the HOA in order to provide the necessary resources for the renovation of the building and to organize the performance of all activities for the renovation. The Mayor signs the trilateral target financing agreement with BDB and Regional Governor for the funding for the projects and later all annexes for the funding of every single required activity. The municipality conducts all required public procurement procedures for selection of contractors for the implementation of the all eligible activities and the Mayor signs contracts with the selected companies for the performance of the required activities. For the technical and energy audit contracts, an advance payment of up to 35 percent and a final payment are allowed. For the project design and the construction works, the municipality is entitled to receive an advance payment of up to 35 percent, as well as interim and final payments. Unforeseen costs for the construction works should amount to a maximum of 10 percent of the total value. All contractors must provide a guarantee to cover the full amount of the advance payment and a contract performance guarantee. The Municipality controls and accepts the work performed by every contractor as it is required in the respective regulation. The Municipality keeps a public registry of the HOAs on its territory and a database about the implementation of the projects. It presents all required reports and documents to the other stakeholders responsible for the management and coordination, for the control of the procedures and for the financing of the Program. The Final Beneficiaries are the HOAs created and officially registered for the participation in the Program. HOAs submit the required documentation and the Requests for participation to the Municipality. After the approval of the Request by the Mayor, the Chairperson of the HOA concludes a contract with the Mayor. The HOAs should confirm the approval of the envisaged ESMs recommended in the energy audit and to sign the project design and documentation for commissioning of the construction works. 78 The contractors in the implementation phase of any building renovation project are as follows: • Technical auditors, which providing the technical auditing and executive drawings of the building before the implementation of the measures, then issue the Technical Passport of the building; • Energy Auditors, which conduct the energy auditing of the building (including recommendation of ESM and technical and financial analysis) and issue the Energy Performance Certificate before the implementation of the measures; • Project Designers, which prepare the project design and the bills of quantities as well as conducting the designer-side construction supervision; • Construction companies, which implement all construction works as described in the approved project design documentation; • Construction supervisors, which perform a Conformity Assessment of the project design documentation, exert constant on-site control over the construction process, monitor the quality of the construction process, and verify the products and materials used in construction, prepare and track the contract execution and signing of all construction documents required by the legislation, and prepare an updated version of the Technical Passport of the building after the completion of the construction works; and • Investor-side supervisors, which provide on-site control over the execution of the contract for the construction works. Investment costs and energy savings At the beginning of the Program, no restrictions were introduced on the size of the investment. After an analysis of the submitted offers by the applicants in the first tendering procedures conducted after the start of the Program, MRDPW has decided to introduce so called “Reference pricesâ€? for the execution of the different activities within the Program. The “Reference pricesâ€? are the maximal allowed prices for any activity and are obligatory to be referred in the announcements of the tendering procedures for selection of the respective contractors. The first “reference pricesâ€? were issued on 26 October 2015; two more editions have subsequently been issued. All adopted “reference pricesâ€? are summarized in Table A4-1. The most detailed information for the energy consumption of the buildings and the expected energy savings extracted from the energy audits is preserved in the database of SEDA. Table A4- 2 shows summary data about the energy classes of the buildings included in the first phase of the Program before and after the proposed measures in the energy audits. 79 Table A4-1. “Reference Pricesâ€? for Execution of Activates within the Program Activity Dimension 26 October 2015 25 January 2016 6 October 2016 BGN, BGN, BGN, BGN, BGN, BGN, without with without with without with VAT VAT VAT VAT VAT VAT Expenditures for technical audit, m2 12.50 15.00 7.00 8.40 5.00 6.00 technical passport and energy audit Expenditures for project design and for m2 15.00 18.00 8.00 9.60 5.00 6.00 designer-side supervision Expenditures for conformity assessment m2 2.00 2.40 1.25 1.50 0.85 1.02 of the investment project Expenditures for construction m2 7.00 8.40 2.50 3.00 1.75 2.10 supervision Expenditures for construction and m2 250.00 300.00 140.00 168.00 115.00 138.00 installation works - buildings < 8 floors Expenditures for construction and m2 250.00 300.00 140.00 168.00 130.00 156.00 installation works - buildings > 8 floors Expenditures for Investor-side m2 4.00 4.80 1.25 1.50 0.85 1.02 supervision TOTAL – buildings less than 8 floors m2 290.50 348.60 160.00 192.00 128.45 154.14 TOTAL – buildings over 8 floors m2 290.50 348.60 160.00 192.00 143.45 172.14 Table A4-2. Energy Classes Before and After Measures Energy class A B C D E F G Count before 0 2 9 152 819 713 326 measures Before 4 579 4 112 1 587 measures, total 1 158.3 14 185.5 796 900.1 738.2 556.3 021.4 area, m2 Before measures, av. 579.1 1 576.2 5 242.8 5 591.9 5 768.0 4 868.2 area, m2 Count after 1 170 1848 2 measures After measures, 10 435 630 552 532.5 2 716.2 area, m2 677.1 After measures, 630 3 250.2 5647.0 1 358.1 av. area, m2 Source: SEDA database. The database by SEDA also contains the investments cost calculated by the energy auditors and the expected energy savings and CO2 emission reductions. Based on that some basic specific parameters are calculated for the projects, shown in Table A4-3. 80 Table A4-3. General Parameters for the Implemented Projects (SEDA Database) Parameter Value Number of buildings 2021 2 Area of buildings (m ) 10,991,556 Investment (BGN) 973,534,212 Annual savings (BGN/year) 118,458,626 Average payback period (years) 8.2 Final energy savings (kWh/year) 934,278,959 2 2 Final energy savings per m (kWh/m ) 85.0 Investment per saved kWh (BGN/kWh) 1.04 Investment per m2 (BGN/m2) 88.57 CO2 emission reduction (t/year) 308,733 Investment per reduced CO2 (BGN/tCO2) 3,153 Source: SEDA database. A sample of the BDB public register for 547 buildings for which the contracts has been closed by February 2018 was taken. The pricing information from the BDB register, available on the Bank's website, was analyzed together with the data for the total area and the energy consumption of the buildings in the database of SEDA. The results obtained are summarized in Table A4-4. Table A4-4. General Parameters for the Implemented Projects (SEDA and BDB Databases Combined) Parameter Value Note Number of buildings 547 Source: BDB DB + SEDA DB Area of buildings (m2) 2,832,621 Source: SEDA DB Investment (amount paid) (BGN) 542,006,283 Source: BDB DB Investment according energy audit 289,326,207 Source: SEDA DB (BGN) Annual savings in energy audit 35,676,330 Source: SEDA DB (BGN/year) Average payback period (years) 15.2 Calculated with investment costs by BDB DB Average payback period (years) 8.1 Calculated with investment costs by SEDA DB Final energy savings (kWh/year) 254,801,264 Source: SEDA DB Final energy savings per m2 (kWh/m2) 89.95 Calculated Investment per saved kWh (BGN/kWh) 2.13 Calculated with investment costs by BDB DB Investment per saved kWh (BGN/kWh) 1.14 Calculated with investment costs by SEDA DB Investment per m2 (BGN/m2) 191.34 Calculated with investment costs by BDB DB Investment per m2 (BGN/m2) 102.14 Calculated with investment costs by SEDA DB CO2 emission reduction (t/year 76,328 Source: SEDA DB Investment per reduced CO2 (BGN/tCO2) 7,101 Calculated with investment costs by BDB DB Investment per reduced CO2 (BGN/tCO2) 3,791 Calculated with investment costs by SEDA DB 81 Annex 5. Comparison Analysis of Potential Candidates for Holding Fund for Phase 2 The following table compares the capacity, experience and functions of four existing national financial institutions that could serve as the holding fund (HF) for Phase 2 of the program—BDB, the FLAG Fund, the Fund of Funds, and the Bulgaria Energy Efficiency and Renewable Sources Fund (EERSF). It should be noted that the HF under Phase 2 could be either a new or an existing entity. A new entity would have certain advantages over existing ones, such as it could be specifically set-up and staffed to serve the program’s needs. However, as with most governments, creating a new public organization may be politically difficult and impose additional costs. Existing entities would allow Phase 2 to be initiated more quickly and build on their existing capabilities but each has their own mandate, strategies, products, staffing, etc. which may constrain program activities. Agency Name BDB FLAG fund Fund of Funds EERSF Agency Website http://www.bbr.bg/en http://www.flag-bg.com/?l=2 http://www.fmfib.bg/en https://www.bgeef.com/bg/ Owner/Founder 99% owned by the Bulgarian State Established by Decree No 4 of the JSC owned by the State. Established pursuant to the of the Agency Council of Ministers of 7 March Established by Bulgaria’s Energy Efficiency Act of 2004, 2007 Council of Ministers as a EERSF was initially capitalized special-purpose vehicle fully entirely through grant funds owned by the State. with the international donors and the Ministry of Economy. Legal status and BDB is a financial institution with a Acts as an instrument of state Is a managing company of the Operating as a revolving fund main functions license for banking activity since 25 regional development policy investment fund "Fund of and managed by "EEE" of the agency February 1999. implementation. Funds" (FNF) and acting as a Consortium between Econoler FLAG supports municipalities, Fund Manager of Financial International, Eneffect and BDB's subsidiaries include the associations of municipalities, Instruments in Bulgaria. Elana. Provides funding for National Guarantee Fund (NGF), and companies with municipal or Manages the financial energy efficiency projects in which issues guarantees for bank mixed state-municipal instruments designed to the form of loans and loans to the real estate sector, and participation in the preparation support the implementation of guarantees. the Microfinance Institution JOBS, and implementation of projects programs co-financed by the Fund was initially capitalized which provides financing to micro for expansion and modernization European Structural and by the grants from the and small companies. of municipal infrastructure and Investment Funds, i.e. OP following main donors: the creation of sustainable and Human Resource Development World Bank (Global modern local communities. 2014-2020, OP Innovations Environment Facility US$10 Subsidiary: Sustainable Urban and Competitiveness 2014- million), Government of Development Fund of Sofia 2020, OP Regions in Growth Austria €1.5 million (Federal (SFGRS) 2014-2020 and OP Ministry of Finance), Bulgarian Environment 2014-2020, the Government €1.5 million 82 Agency Name BDB FLAG fund Fund of Funds EERSF Rural Development (Ministry of Economy and Programme 2014-2020 and Energy) and private donors. the Maritime and Fisheries Programme 2014-2020. Years of 19 years 11 years 2.5 years 13 years operation Current value BGN 868 million -the credit portfolio BGN 883 million - value of BGN 234 million - value of the BGN 83.4 million - value of of the projects as of 31 December 2016 is. approved credits in 2009-2016 asset as at 30 September 2017 financed projects since the portfolio in BGN 204 million - value of initial capitalization, including million BGN disbursements with municipal BGN 59 million loans. funds. BGN 12.3 million - value of the EERSF projects portfolio as of Q1, 2018. Number of Leasing Line Program. Start-up 170 active loans as at 31 The contribution of four of the EERSF financed more than 200 projects; budget of €25 million; 10 financial December, 2016 -at the amount operational programs to the projects. Main sources of institutions with a total interest of of BGN 136 million, of which 16% FNF amounted to €606 million As of Q1, 2018, the EERSF financing €34.75 million; €20 million financing are bridge credits for BGN 21 earmarked for FI. Through the projects portfolio is BGN 12.3 agreement from ICBC - for total million and 84% equity for BGN so-called leverage effect, an million and the number of credit activity, direct business 114 million. integral part of the design of projects is 55. financing, creation of on-line FLAG provides loans to the instruments, the Fund will programs. beneficiaries or their associated mobilize a ~ €1.4 billion Agreements with the Council of partners for the preparation or resource to be invested in the Europe Development Bank (CEDB) implementation of projects under Bulgarian economy. for €150 million and with KfW for the Operational Programs, RDP, The FNF under the Agreement €100 million credits to finance EE Cross-Border Cooperation with MRDPW takes over the measures in the framework of Programs and other programs management of JESSICA's BGN National Program for EE of multi- and financial mechanisms funded 66 million, which was family buildings. by EU funds or other disbursed as loans and repaid Agreement with the European international programs (Financial from the JESSICA mechanism Investment Bank (EIB) to finance Mechanism EEA 2009-2014, funded by OP "Regional SMEs amounting to €150 million; Norwegian Financial Mechanism Development" 2007-2013. This Agreement to issue a counter- 2009-2014, Bulgarian-Swiss is the so-called "recycling" of guarantee with the European Cooperation Program for funds. Investment Fund (EIF) under the Reducing Economic and Social COSME program. Inequalities within the Enlarged European Union 2009-2019). The 83 Agency Name BDB FLAG fund Fund of Funds EERSF maximum amount of credit(s) to implement a project(s) to one municipality is BGN 10 million. Types of Investment loans, working capital Short-term loans and long-term Micro-crediting with risk- Loans and partial credit financial loans and bank guarantees. loans (repayment term over 1 sharing; leverage effect; guarantees. products year) - bridge and own funds. portfolio guarantees with a managed loss ceiling; equity / quasi- equity investments; risk- (grants, sharing finance, portfolio repayable guarantees; built-in grants, loans, warranties; loans and guarantees, guarantees; equity, quasi- a special investment structure equity etc.) that combines debt and guarantees to finance water and sewerage infrastructure. Energy BDB is oriented towards pre-export Local sustainable development; OP Regional Development - Energy efficiency projects in efficiency and and export lending to SMEs; crediting modernization and extension of Establishment of three public and private buildings, other sectors of via intermediary banks or directly to municipal infrastructure; creating Regional Urban Development street lighting, industrial financing and other types of SME activities; sustainable local communities. Funds - FGR Sofia, FGR North processes and renewable refinancing of banks crediting to and FGR South; OP Innovation energy. Funding provided to main SMEs. and Competitiveness; OP municipalities, companies and beneficiaries Environment - projects for individuals. Provides lending Energy efficiency - BDB attracted incl. lending to waste management and water both directly to the beneficiary BGN 2 billion for Phase 1 from IFIs municipalities projects; OP Human Resources or through ESCO contracts. with an MOF guarantee. BDB and/or HOAs concludes tripartite contracts with Development; Rural municipalities, HOAs and district Development Program. governors. BDB pays all invoices approved by the municipalities. Number of 153 employees, 22 employees, 30 employees, 4 employees, employees and as of December 31, 2016. including a board of directors with experience in the private in the "EEE" Consortium: main areas of Supervisory Board (Chairman, (chairman and six members) and and public sector and expertise executive director, deputy expertise Deputy Chairman and Member of an executive director. in the structuring and director, technical expert, the Supervisory Board) and implementation of financial financial expert. Managing Board (Chairman and instruments in the field of 84 Agency Name BDB FLAG fund Fund of Funds EERSF Executive Director, Deputy economic, social and Chairperson and Executive Director, regional development, risk Member and Executive Director of management, compliance, law, the MB) finance and marketing. Management: Supervisory Board (7 people) and Management Board (4 people). Annual Assets: BGN 2,129 billion. Expenditures in 2016: BGN 6.6 For the period 1 Jan. - 30 Sep. Annual operational costs of the operational Loans of companies: BGN 684 million, of which BGN 0.747 2017, net cash flows from Fund approximately BGN 0.8 costs of the million. million for impairment of loans operating activities: BGN 11.2 million. agency in On-lending financing: BGN 145 granted. Incomes in 2016: BGN million. Sources of financing: EERSF does not operate with million. 9.57 million. European funding: ERDF, CF, external loans from other million BGN Equity: BGN 750 million. EAFRD, ESF, EMFF, ESF / IMP. financial institutions; however, and sources of Profit: BGN 15.88 million National funding: State it is not restricted and is costs funding NGF Guarantee Schemes: 2009-2015 budget. optional. - Loans: 1135 million euro; Bank guarantees: €774 million; NGF Guarantee Schemes: 2009-2015 - Loans: 1135 million euro; Bank guarantees: €774 million. Information No information available. No information available. No information available. Tonegan, Ajur L, Astra, Excel systems used for portfolio management 85 Agency Name BDB FLAG fund Fund of Funds EERSF Work BDB offers direct financing and EIB; International Programs - EEA EIB, EBRD, World Bank. IFFIB is EBRD, EIB and several local experience with provides resources through other Financial Mechanism 2009-2014; working to create: Seed / commercial banks such as financial banks. BDB created a subsidiary, NGF Norwegian Financial Mechanism Start-up Fund; Mezzanine Raiffeisenbank (Bulgaria), UBB, intermediaries (National Guarantee Fund), which 2009-2014; Bulgarian-Swiss Fund / Development Fund; Unicredit Bulbank, DSK Bank, issues guarantees. Over the last 4 cooperation program to reduce Urban Development Fund (s); Tokuda bank. or other years, NGF has cooperated with 19 economic and social inequalities Portfolio Guarantees under OS implementing banks and supported 2,600 within the enlarged EU 2009- 2 (OPE) – Waste. partners companies. BDB has attracted funds 2019, JESSICA initiative and from IFIs including the European others. Investment Bank (EIB), the European Investment Fund (EIF), the Council of Europe Development Bank (CEB), the Industrial and Commercial Bank of China (ICBC) and KfW. 86