ESCO factoring: How UNDP is helping Ukraine improve energy efficiency in public buildings
Dafina Gercheva, UNDP Resident Representative to Ukraine
For every euro that European states spend on heating public facilities, such as schools, kindergartens, and hospitals, Ukraine spends two or even three.
The country’s 78,000 public facilities have low energy efficiency, high energy consumption, and a huge need for modernization, according to the State Agency on Energy Efficiency and Energy Saving of Ukraine.
Experts from the Agency estimate that around EUR 7 billion in investment is required to renovate Ukraine’s thousands of public buildings. Given that the Ukrainian public sector can only cover part of those needs, the United Nations Development Programme (UNDP) is actively implementing a new, effective mechanism to attract investments in energy efficiency, with the aim of reducing energy consumption in public buildings in small- and medium-sized cities across Ukraine.
Boosting energy efficiency
The new mechanism, called ESCO factoring, provides loans to energy service companies so that they can implement energy efficiency measures in public buildings.
Such measures include insulating walls and roofs, replacing windows, installing individual heating systems, thermostats and LED lighting, and introducing energy management systems. Together, these not only cut energy use and costs, but also lower CO2 emissions and contribute to mitigate climate change.
Here’s how it works: A contract of up to 15 years is signed between a public building and an energy service company, or ESCO. The ESCO implements energy efficiency improvements using a loan from a bank, and then transfers to the bank the rights to reclaim the money back over the period of the contract from the savings achieved by improving the building’s energy efficiency. The amount paid to the bank for its services can be between 80–100 percent of the energy savings. After the rights are transferred, the ESCO can start a new project or obtain a new loan.
Expert support
Experience suggests that ESCO factoring is identified as potentially one of the most effective and efficient financial mechanisms for implementing energy efficiency measures in public buildings in Ukraine.
Under the framework of the GEF-UNDP project “Removing Barriers to Increase Investment in Energy Efficiency in Public Buildings in Ukraine through the ESCO Modality in Small and Medium Sized Cities,” the implementation of this mechanism was launched at the beginning of 2019.
In February 2019 the first “ESCO factoring” agreement, worth UAH 2.8 million, was signed between KyivESCO and the Commercial Industrial Bank. Over the six months of this pilot project’s implementation in Kyiv, Borodyanka, Drohobych and Kherson, the company managed to repay the 85 percent of the total loan amount ahead of its payment schedule. This successful test of the mechanism paved the way for new ESCO factoring agreements with an increased loan amounts to be subsequently signed.
Currently, three ESCO companies (KyivESCO, Energo-Tech-Invest and ESCO UA) are actively engaged in using this type of lending facility for financing energy service projects in Ukraine. In August 2019, the Commercial Industrial Bank provided Energo-Tech-Invest with a loan of UAH 1.46 million, and gave KyivESCO a loan of UAH 15.8 million split into two tranches worth UAH 7.3 million and UAH 8.5 million respectively.
“ESCO factoring” projects are now operating across the country: in Kyiv, Kherson, Kharkiv, Lviv, Zhytomyr, Odesa, Luhansk and other regions of Ukraine.
Apart from the Commercial Industrial Bank, other Ukrainian financial institutions — TasComBank and UkrGasBank — have expressed interest in providing loans to energy services companies for energy efficiency improvement in public buildings in Ukraine.
ESCO factoring thus looks set to attract more investments in the energy efficiency sector, improving living conditions, strengthening country’s energy security, and reducing CO2 emissions.
The ESCO factoring mechanism was developed and implemented in Ukraine as part of the UNDP/GEF project “Removing Barriers to Increase Investment in Energy Efficiency in Public Buildings in Ukraine through the ESCO Modality in Small and Medium Sized Cities,” with the support of, and in partnership with, the State Agency on Energy Efficiency and Energy Saving of Ukraine and the Ukrainian Association of Energy Service Companies.
