CENTER FOR STRATEGIC STUDIES SAM REVIEW. Volume 15, July 2015 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

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1 CENTER FOR STRATEGIC STUDIES Volume 15, July 2015 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL Shahmar Hajiyev, Zefi Dimadama & Alexia Timotheou and Z ev Gross BAKU-2015 VOLUME 15, JULY

2 2015 SAM - Center for Strategic Studies. All rights reserved. The views represented here are the authors own and do not necessarily reflect the views of SAM, its staff, or its trustees. Note: The authors agreed on the final version of the report. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the SAM. Please direct inquiries to: SAM - Center for Strategic Studies Mirza Ibrahimov 8, Baku, Azerbaijan, AZ1005 Tel: (+99412) Fax: (+99412) info@sam.gov.az Cover and Page design: Intigam Mehemmedli This publication may be reproduced in whole or in part in any form for educational or non-profit purposes without special permission from the copyright holder, as long as provided acknowledgement of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from Center for Strategic Studies. Disclaimer: The contents of this publication are the authors sole responsibility. They do not necessarily represent the views of the Center for Strategic Studies or of the organization for which the authors work. About Center for Strategic Studies under the President of the Republic of Azerbaijan The Center for Strategic Studies ( is Azerbaijan s first government- funded, non-profit and academically independent think tank, known as Strateji Araşdırmalar Mərkəzi (SAM) in Azerbaijani. The mission of SAM is to promote collaborative research and enhance the strategic debate as well as providing decision-makers with high quality analysis and innovative proposals for action. Through publications, brainstorming meetings, conferences as well as policy recommendations, SAM conducts rigorous research guided by a forward-looking policy orientation, thus bringing new perspectives to academic research in international level. SAM was ranked 123rd in the top 150 global think tanks according to 2013 Global Go To Think Tanks Rankings and associated trends report by Pennsylvania University. 2 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

3 CONTENTS: Illustrations...6 Executive summary...8 Chapter I: Energy Efficiency in Azerbaijan: Policies and Challenges 1. Introduction Energy Efficiency Laws and Programs Tariffs Institutional Framework Sectoral Overview of Energy Efficiency General Overview Households Transport Sector Industry Renewable Energy...28 Chapter II: Germany - A Champion in Energy Efficiency 1. Introduction Energy Policy in Germany: The European Framework on Energy Efficiency Germany s Approach Sectoral Overview of Energy Efficiency The Building Sector: A Detailed Review Lessons Learned Best Practice Presentation KfW Programs Results Lessons Learned Limitations Germany and Azerbaijan: Energy Efficiency Cooperation Opportunities Chapter III: Energy Efficiency Policy in Israel - An Overview with Recommendations for Future Collaboration with Azerbaijan 1. Introduction Institutional Framework Policies Policy Implementation - Energy Efficiency Market Transformation Activities Resource Acquisition Activities Financing of Energy Efficiency Activities Results of Energy Efficiency Measures Additional Instruments for Sustainability Renewable Energy Possible Avenues of Future Collaboration Appendix...65 VOLUME 15, JULY

4 About the Authors Shahmar HAJIYEV is a Senior Research Fellow in the Economic Analysis and Global Affairs Department at the Center for Strategic Studies (SAM) under the President of the Republic of Azerbaijan. Before joining SAM, he worked at the State Oil Company of Azerbaijan Republic (SOCAR). He participated in the Analyst Development Program of the Texas-based Strategic Forecasting, Inc., (STRATFOR) where he worked with STRATFOR analysts and staff to research a variety of issues and gather information on global developments. Additionally, he has participated in the Green Economy Program run by inter alia the Israeli Agency for International Development and Cooperation, Ministry of Foreign Affairs (MASHAV) and the Renewables Academy (RENAC) in Germany. Mr. Hajiyev received his BA in European Studies from Azerbaijan University of Languages and MA in International Economic and Political Studies from the Charles University in Prague, Czech Republic. His research interests include energy security issues in the EU and the Caspian basin, energy economics, renewable energy sources, energy efficiency, green economy and green technology. He has published several articles on these subjects. Dr. Zefi DIMADAMA, is Director General of the International Centre for Black Sea Studies (ICBSS) and Lecturer at the Graduate Program of Political Science at Panteion University of Political & Social Sciences. She has a post-graduate Diploma (MSc) in Economic and Regional Development and a PhD on Environmental policies and Regional Development from Panteion University. She has developed numerous research projects on Economic and Environmental Policies in Greece, the United Kingdom (University of Bristol), and Germany, where she was a scientific partner in interstate projects at the Volkswagen Stiftung and a Senior Research Fellow at Darmstadt University. Dr. Dimadama has worked also as a Senior Research Fellow at the Institute of Urban Environment and Human Resources at Panteion University; she has participated as a scientific researcher in several European and international conferences and has coordinated a number of European Research Networks; inter alia ESPON/European Spatial Planning Observatory Network , FP7 Research Programs, Horizon 2020 Projects. Dr. Dimadama is a Member of the Scientific Board of the American Meteorological Society (AMS) Ad Hoc International Committee of the Board on Enterprise Economic Development in Boston, USA, a Member of the Regional Science Association (RSA) and the European Urban Research Association (EURA), a Member of the CLIMBIZ Scientific Advisory Committee Climate Change Vulnerability and Impact Assessment Review for the Black Sea Region (UNDP-Black Sea Trade & Investment Programme) and International Advisor at the Research Institute for European and American Studies (RIEAS). She has published numerous articles in scientific Journals both in English and Greek; as well as, a monograph in Greek, Dimadama, Z. Economy, Development and Environment, Theoretical approaches and sustainable development policies (Papazisis Press, 2008). She is also a Member of the Editorial Board of the International Journal of Environmental Protection (IJEP) Beijing-China. 4 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

5 Alexia TIMOTHEOU is the ICBSS Expert on Environment & Sustainable Development. She holds a diploma in Planning and Regional Development from the Engineering School in Volos, University of Thessaly, as well as MSc. in Environment and Sustainable Development from the Bartlett, Development Planning Unit, and UCL. She has worked as a researcher in the University Institute of Urban Environment and Human Resources at Panteion University, Athens ( ), where she was involved in European research programs in the sectors of spatial policy and planning, environmental policy, sustainable development, local government and governance (FP6, FP7, INTERREG etc.). Since 2008 she has been working as a freelancer in the fields of good governance, environmental policy, local government and regional policies for the private and public sectors. In 2010 she started cooperating with the International Centre for Black Sea Studies (ICBSS) as an Environment and Sustainable Development Expert, participating in research projects across different disciplines (planning, environment and energy, social policy, science, technology and innovation) and with a range of partners (Black Sea, Eastern Mediterranean, Central Asian, Eastern and Western European countries). Z ev GROSS holds academic qualifications in both Geology and Law. He has practiced Corporate Law, dealing with matters both local and international. Mr. Gross was introduced to the world of energy efficiency when he joined the Legal Department of Israel Ministry of National Infrastructures, where he served as counsel to the Energy Efficiency Division. Within a year he was appointed de facto Head of the Division where he spearheaded regulation, incetivization programs and introduced the Performance Contracting methodology. His efforts in the areas of energy efficiency projects led the Ministry to make the Division responsible for non-utility scale renewable energy projects. His mandate was expanded to include international efforts of the Ministry in the areas of energy efficiency and renewable energy sources. After leaving the Ministry in 2011, he served as consultant to local and international entities, participating in the drafting of the energy efficiency law of an African country, service in the capacity of Country Coordinator (Israel) for the EU Paving the Way for the Mediterranean Solar Plan program and consulting to the Israel Ministry of Health in Israel s largest government energy efficiency project -- the energy performance contracting effort for all the Israeli government hospitals. He also served as visiting lecturer on energy policy issues at some of Israel s leading institutes in courses aimed at energy and sustainability capacity building for developing countries. Today, Mr. Gross continues to serve as a consultant to the Israeli government (Ministry of Health, Ministry of Foreign Affairs) as well as to private sector stakeholders, as well as participating in capacity building initiatives of all kinds. VOLUME 15, JULY

6 ILLUSTRATIONS Chapter I: FIGURES Figure 1: GDP energy intensity in Azerbaijan ( ) Figure 2: Most energy efficient countries in Eurasia (2013) Figure 3: Primary energy production (%, ) Figure 4: Final consumption of energy products (%, ) Figure 5: Final energy consumption by active types of economy (%, ) Figure 6: Commodity balance of electricity ( ) Figure 7: Final electricity consumption by sectors (%, 2014) Figure 8: Energy consumption in households (thsd. TOE, 2014) Figure 9: Energy consumption & distribution of energy resources in transport (thsd. TOE, 2014) Figure 10: Goods transportation in the transport sectors (thsd. tons, ) Figure 11: Conveyance of passengers in transport sectors (thsd. passengers, ) Figure 12: Final energy consumption trend in industry & constriction (thsd. TOE, ) Figure 13: Final energy consumption of industry & construction by type of fuels (thsd. TOE, 2014) Figure 14: RES potential in Azerbaijan Figure 15: RES Target for 2020 TABLES Table 1: Table 2: Table 3: Table 4: Regulation of electricity tariffs within the country by the Tariff Council Processing, transportation, wholesale and retail tariffs (including VAT) of natural gas Some barriers to energy efficiency Tariff rates for electricity producers and customers Picture 1: Heat loss and insulation (thermal image) 6 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

7 Chapter II: BOXES Box 1: Box 2: Box 3: Box 4: EU policies to improve energy efficiency Measures to promote energy savings Goals of the Federal Government s Energy Concept Energy Package six laws and one ordinance Table 1: Packages and measures supported by the KfW programs Figure 1: KfW Efficiency House Standard Chapter III: FIGURES Figure 1: Israel s Fuel Mix for Electricity Generation Figure 2: Israel s Projected Energy Consumption (TWh/annum) (Blue Curve - BA; Red Curve EE Target) Figure 3: Comparative Generation vs. EAC Figure 4: Israel s Inland Electricity Consumption by Consumer Sector 2012/2013 Figure 5: Israel Projected Fuel Mix for Production of Electricity Figure 6: The Electricity Sector by Fuel Mix 2009/2020 VOLUME 15, JULY

8 EXECUTIVE SUMMARY As an integral part of sustainable energy policy, energy efficiency policies and measures are important for sustainable economic development. In the context of volatile energy prices and growing scarcity of energy resources, both prosperity and competitiveness are increasingly dependent on energy efficiency. Improved energy efficiency -- a key component of modern energy systems -- can lead to abundant, cheap and clean energy. It can also be a key policy tool for reducing energy costs, promoting sustainable economic growth for social development, improving productivity and reducing GHG emissions. In general, this applies to households, industry and the transport sector. The current publication, titled Energy Efficiency: View from Azerbaijan, Germany and Israel, addresses a range of key issues such as assessing energy efficiency potential, progress and problems. It evaluates various policies regarding energy efficiency, tools, activities and programs in Azerbaijan, Israel and Germany. The research provides a broader picture of the experience of these three countries, as well as setting forth potential avenues for future collaboration. The authors analyze the issue from various perspectives. It is worth noting that in terms of energy consumption, all three countries are focused on energy efficiency improvement measures in order to reduce energy costs and emissions, increase export capacities, and make energy savings. All three countries aim to increase the share of renewables in electricity generation and total energy consumption. To this extent, solar and wind energy will provide reliable sources of energy, as the countries will increase investment in these sectors and successfully use this power in electricity production. Last but not least, there are opportunities for cooperation among these three countries. Azerbaijan could benefit from Germany s technological experience and expertise in terms of building its sustainable development and competitiveness. Israel has always been willing to share its knowledge and experience, generally taking on the role of teacher/instructor/mentor (as opposed to financier) in its fields of expertise. Therefore, Israel could contribute to the areas of policy, legislation and regulatory development, as well as program development and implementation. 8 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

9 CHAPTER 1 Energy Efficiency in Azerbaijan: Policies and Challenges Shahmar HAJIYEV 1. INTRODUCTION The Republic of Azerbaijan ratified the Energy Charter Treaty (ECT) and the Protocol on Energy Efficiency and Related Environmental Aspects (PEEREA) on December 12, Article 19 of the ECT requires all member countries to strive to minimize harmful environmental impacts resulting from all operations along the entire energy chain. In doing so, member states shall act in a cost-effective manner, strive to take precautionary measures, and have agreed that the polluter pays principle should apply. The PEEREA is designed to reinforce energy efficiency policies and programs based on the following principles: the introduction of market mechanisms and price formation reflecting real energy and environmental costs; costeffective energy policies; transparency of regulatory frameworks; dissemination and transfer of technologies; the establishment of domestic programs for improving energy efficiency; and the promotion of investments. The Protocol requires member governments to formulate policy aims and strategies for energy efficiency (Article 5), establish relevant policies (Article 3.2), develop, implement, and update energy efficiency programs, and create the necessary legal (Article 3.2), regulatory (Article 3.2) and institutional (Article 8.3) environment for more efficiency energy use. 1 However, it is also important to note that energy efficiency as a catalyst for sustainable development is in the very early stages. Azerbaijan is rich in natural resources, and the country s oil and natural gas production meets all domestic energy needs. At the same time, the promotion of energy efficiency is one of the main priorities of the state s energy policy direction. In terms of energy consumption, the country is committed to energy efficiency improvement measures aimed at reducing energy costs and emissions, and increasing export capacity and energy savings. 1 Energy Charter, Treaty Provisions & PEEREA [Online] Available at: [Accessed 22 Jan. 2015] VOLUME 15, JULY

10 FIGURE 1: GDP Energy intensity in Azerbaijan ( ) Source: Figure 1 highlights that energy intensity has improved significantly since independence. 2 One of the main reasons for the sharp decline in energy intensity has been the growth in GDP in recent years. Other factors include reforms in the energy sector such as the shift towards electricity generated by natural gas as well as the installation of gas and electricity meters. For example, total primary energy consumption dropped to its lowest point since independence, even though GDP growth was equal to 5.8% in FIGURE 2: Most Energy Efficient Countries in Eurasia Source: 2 Energy intensity is measured as the ratio between gross inland consumption of energy and GDP; this indicator is a key indicator for measuring progress under the Europe 2020 strategy for smart, sustainable and inclusive growth. Improvements in Energy Intensity include energy efficiency and conservation as well as structural factors not related to technology or behavior 3 Central Intelligence Agency, 10 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

11 Figure 2 shows that Azerbaijan took a mid-ranking position among Eurasian countries in However, there is more potential for energy efficiency improvements. An overall performance analysis of EU countries demonstrates that Denmark, Ireland, Austria, UK and Germany are the most energy efficient countries in Europe. For example, according to a study of 16 major economies by the Washington-based American Council for an Energy-Efficient Economy, Germany is the world s most energy efficient country with strong codes on residential and commercial buildings as of ENERGY EFFICIENCY LAWS AND PROGRAMS Insuring long-term energy security is a state policy goal for advancing economic growth. Given that Azerbaijan already meets all its energy needs, and is also a net energy exporter, the momentum for improving energy efficiency and developing alternative and renewable energy sources is crucial to sustainable development. Legislation and government regulations play an important role achieving energy efficiency, without which even new technologies cannot bring about true efficiency. Within this context, there are two major incentives that could stimulate the country s energy efficiency program: A motivation system that combines economic tools such as standards, requirements, prices, tax cuts, loans and fines; and A monitoring system by relevant agencies to collect data, analyze and track the development of energy efficiency in the country. Exact data collection crucial to analyze and improving the situation. The Law of the Azerbaijani Republic on Utilization of Energy Resources (May 30, 1996) defines the legal, economic and social bases of state policy on energy resources, and the main implementation mechanisms. The law also regulates relations between the state and legal entities and physical persons arising in this area. It envisages an energy saving policy -- via legal, organizational and financial and economic regulation of production processes (net output), thorough revision, conversion, transportation, storage, accounting and consuming of energy resources for the purpose of their woodland conservation and economic expenditure. The state policy in the field of usage of energy resources is based on the following principles: 4 Implementation of state regulation of activity of legal entities and physical persons in the field of energy saving via economic and administrative measures; Prioritized requirements of energy saving, application of mechanisms for economic and legal stimulation when implementing activities linked to production (net output), thorough revision, transportation, storage and usage of energy resources; Regulation and standardization in the field of energy saving and effective use of energy resources, obligation to comply with standards and power engineering standard rates; Combination of interests of producers, front-end pickups and consumers of energy resources; 4 Law of the Azerbaijan Republic on Utilization of Energy Resources, VOLUME 15, JULY

12 Obligation of companies and organizations, irrespective of ownership, to account for energy resources consumed; and Required energy examination of construction and reconstruction of entities. The National Program on Environmentally Sustainable Socio-Economic Development for adopted by the government identifies natural resource usage mechanism, and states that the development of the economy should be based on principles of sustainability. It also provides for the introduction of energy effective technologies to reduce use of energy per unit of product. In this context, the Action Plan for Implementation of the National Plan sets forth the following important implementation measures: 5 Introduction of highly efficient technologies at heat power plants and optimization of the structure of the power system; Development and introduction of a scheme of small hydropower facilities; Promoting modern energy saving technologies in production and non-production sectors; Development and implementation of national and regional programs aimed at more effective use of energy saving means in households (thermoses, temperature saving devices); Development of national action plans for wind and solar energy; Introduction of energy effective technologies to reduce use of energy per unit of product; and Use of leading technologies in mining to prevent losses and ensure effective use of natural resources. The State Program for the Development of the Fuel and Energy Sector ( ) identifies and sets development targets for the various sub-sectors within the energy sector, as well as providing a package of specifically defined measures aimed at achieving those targets within the prescribed 10-year period. The overall goal of the state program is to meet the electric power, gas and other energy demands of both population and the economy through the continued development of the fuel and energy sector. The principal specific objectives of the state program are as follows: 6 Determine the priority development targets for Azerbaijan s fuel and energy sector in compliance with international best practices and standards; Implement appropriate scientific and institutional actions aimed at enhancing the operational effectiveness of the various industries within the fuel and energy sector; Ensure the implementation of appropriate technological measures for the improved production, processing, transportation, storage, accounting and consumption of energy resources; Increase the volume of investments for the development of the fuel and energy sector; Ensure environmental safety in the fuel and energy sector; and Ensure more complete collections of fuel and energy (electricity and natural gas) bills. The State Program on Use of Alternative and Renewable Energy Sources in the Republic of Azerbaijan (October 21, 2004) was prepared based on the Law on Energy Utilization, 5 National Program on Environmentally Sustainable Socio-Economic Development [DOC], Baku Energy Charter Secretariat, 2013, In-Depth Review of the Energy Efficiency Policy of Azerbaijan [pdf]. Brussels, Belgium, pp ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

13 Law on Power Engineering, Law on Energy, Law on Electric and Thermal Power Plants, State Program on Poverty Reduction and Economic Development for , Measures on Strengthening Financial Discipline in Energy and Water Sectors, State Program on Socio-Economic Development of Regions of the Republic of Azerbaijan for and other normative-legal acts. The main objective of the Program is to promote power generation from renewable and environmentally sound sources and to utilize hydrocarbon energy sources more efficiently. The major tasks are as follows: 7 Define the potential of alternative (renewable) energy sources for electric power generation; Increase the efficiency of the utilization of national energy sources by developing renewable energy sources; Ensure additional jobs through the creation of new energy production sites; and Given the existing total capacity of traditional energy sources in Azerbaijan, increase the energy capacities at the expense of alternative energy sources and thereby achieve national energy security. The Decree of the Cabinet of Ministers about Rules of Electric Energy Usage (February 2, 2005) defines regimes and conditions of the agreement between electricity supplier and consumers, who should prevent inefficient usage and wastage of electric energy. The State Energy Control department of the Ministry of Energy of the Republic of Azerbaijan is responsible for monitoring activity of energy suppliers and consumers and energy efficiency. 8 Last but not least, the Azerbaijan 2020: Look into the Future development concept envisages state regulation that ensures healthy competition in market economy conditions, transformation into an export-oriented, energy efficient economy, and creates high added value. Priority spheres will include the modernization of the oil and gas sector and the petrochemical industry, diversification and development of the non-oil industry, increased opportunities to use alternative and renewable energy sources, development of the agrarian sector, strengthening of food security, expansion and development of trade and services, and improved foreign trade and investment structures. Within the framework of the concept, the government plans to turn the country s economy into one based on efficiency as a result of a growth in general productivity, ensuring transition to a new phase characterized by innovation. 9 All the aforementioned programs and laws demonstrate that the government is interested in a sustainable and competitive economy, which cannot be fully developed without increasing the share of renewables and achieving cost-effective energy conservation. Programs targeting improvement of energy efficiency through the reduction of losses, inefficient usage practices, and prevention of energy theft are important measures. However, institutional improvements remain relatively undeveloped, and therefore, there is a need for stronger strategy on institutional energy efficiency. 7 The State Program on Use of Alternative and Renewable Energy Sources in Azerbaijan Republic 2004, [pdf] Available at 8 ALLPLAN GmbH, 2013, Energy Efficiency Finance: TASK 1 Energy Efficiency Potential. Country Report Azerbaijan [pdf] Vienna, Austria, pp Development Concept Azerbaijan : Outlook for the Future [pdf], Available at VOLUME 15, JULY

14 3. TARIFFS The main legislative acts regulating the power sector are the Law on the Use of Energy Resources, the Law on Electricity and the Law on Power Plants and Heat Generation Plants. The Law on Electricity requires that individuals and legal entities obtain special permission to conduct activities related to the generation, transportation and distribution of electricity if not otherwise determined by law. 10 TABLE 1: Regulation of the electricity tariffs within the country by the Tariff Council. The name of service Tariffs, for 1 kwh (including VAT), kopeck I. Wholesale tariffs 1.2. Generation by Azerenergy OJSC Generation by the private small scale hydraulic stations Generation by the Wind Power Stations 4.5 II. Retail tariffs 2.1. For all consumers 6.0 III. Tariffs for the transit transmission 3.1. Transit transmission of the electricity 0.2 *The wholesale tariffs of the electricity generated by Azerenergy include all expenditures related to generation and transmission to the distribution network Source: TABLE 2: Processing, transportation, wholesale and retail tariffs (including VAT) of natural gas. Names of the services Tariffs (AZN/thousand m3) I. II III 1. Natural gas processing Natural gas transportation (for every 100 km) Wholesale of natural gas to gas distributors Retail of natural gas Sale of natural gas to chemistry, aluminum enterprises, steel foundry on the base of mining ore, as well as electricity generating enterprises consuming natural gas for the purpose of production by connecting to gas main directly (on the condition that monthly consumption is not less than 10 billion m 3 ) 80.0 *Wholesale tariff of natural gas determined in the 3 rd line of the table of the 1 st paragraph of this resolution includes mine tax. Tariffs determined in the 3 rd, 4 th and 5 th lines of the table of the 1 st paragraph of this resolution cover all expenses connected with natural gas transportation. Source: 10 Energy Charter Secretariat, 2013, In-Depth Review of the Energy Efficiency Policy of Azerbaijan [pdf]. Brussels, Belgium, pp ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

15 4. INSTITUTIONAL FRAMEWORK The Ministry of Energy is the central executive body tasked with the implementation of state policy and regulation in the country s fuel and energy complex. The Ministry is mainly responsible for the supervision, regulation and control of the efficient use of the fuel and energy complex, issuance of special permissions (licenses) in cases provided for by legislation, preparation of the annual fuel and energy balance, preparation and implementation of state programs on the development of the industry and energy sectors, coordination of the activities of state-owned enterprises operating in the relevant field, or entities that have a controlling part of the shares at state-ownership. It also participates in the preparation of international agreements on industry and energy cooperation, ensures the implementation of international agreements, and coordinates the work done in this area. 11 The Ministry works closely with the Ministry of Economy and Industry, State Oil Company of the Azerbaijan Republic (SOCAR), Azerenerji JSC and other related organizations. The Ministry of Economy and Industry is a central executive body that develops national economic policy, provides economic and social forecasts, and designs and implements state policy for economic development. It also builds, foreign economic and trade contacts, raises, allocates and promotes investments, internal trade, entrepreneurship, competition (including elimination of unfair competition, protecting consumer rights and regulating the structure and innovations in the national economy), as well as regulating and exercising official control over issues within its sphere of activity. The Ministry s main role in the energy sector is to participate in the development of mechanisms ensuring efficient use of power resources and the energy budget. 12 The State Agency for Alternative and Renewable Energy Sources (SAARES) is the central executive body in the field of renewable energy and energy efficiency. The agency is the principal regulatory institution in the sphere of alternative and renewable energy, and is tasked with assessing sustainable energy potential, shaping relevant policies (including tariff policy), expanding and enforcing relevant procedures, such as issuing special permissions to public and private entities for the construction of power generation facilities. Additionally, in order to speed up and coordinate work more effectively, Azalternativenerji Ltd. was established by the State Agency. Its key focus includes generation, transportation and distribution of power, equipment for power generation, design of units and facilities, manufacturing, construction and operation of facilities as well as activities related to infrastructure. The National Strategy for the Use of Alternative and Renewable Energy Sources for the period of is another important task for which the Agency is responsible. It will identify the main areas of renewables, develop a regulatory framework and stimulate activity in this field Azərbaycan Respublikası Prezidentinin 2014-cü il 11 aprel tarixli 149 nömrəli Fərmanı ilə təsdiq edilmiş Azərbaycan Respublikasının Energetika Nazirliyi haqqında Əsasnamə 12 Addendum II approved by Decree No.504 of the President of the Azerbaijan Republic dated 28 December 2006, Regulations of the Ministry of Economic Development of the Azerbaijan Republic 13 Azərbaycan Respublikası Prezidentinin 2013-cü il 1 fevral tarixli Fərmanı ilə təsdiq edilmiş Azərbaycan Respublikasının Alternativ və Bərpa Olunan Enerji Mənbələri üzrə Dövlət Agentliyi haqqında Əsasnamə VOLUME 15, JULY

16 The State Oil Company of the Azerbaijan Republic (SOCAR) was established in order to use oil resources in accordance with a consistent national policy, improve the management structure of the oil industry, and develop the energy industry. SOCAR is involved in exploring oil and gas fields, producing, processing, and transporting oil, gas, and gas condensate, marketing petroleum and petrochemical products in domestic and international markets, and supplying natural gas to industry and the public in Azerbaijan. Three production divisions, two oil refineries and one gas processing plant, an oil tanker fleet, a deep water platform fabrication yard, two trusts, one institution, and 22 subdivisions are operating as corporate entities under SOCAR. Joint ventures (including in Georgia and Turkey), consortia, and operating companies established with SOCAR s participation are doing business in different parts of the petroleum industry. SOCAR has representative offices in Georgia, Turkey, Romania, Austria, Switzerland, Kazakhstan, Great Britain, Iran, Germany and Ukraine and trading companies in Switzerland, Singapore, Vietnam, Nigeria, and other countries. In total, SOCAR has 24 structures that deal with various spheres such as production, refinery, marketing, geology, and transportation. 14 SOCAR s Azerigaz Production Union transmits, distributes, and markets natural gas in the Republic of Azerbaijan. The syndicate also transports SOCAR gas to the Islamic Republic of Iran, Georgia, and the Russian Federation. The total volume of gas transported annually by the syndicate inside and outside the country is 12.6 billion m 3. By supplying natural gas to all of the country s fossil fuel power plants in the country, Azerigaz plays a significant role in the development of the country s electrical power industry. Six production divisions and organizations are consolidated in the Azerigaz Production Union. 15 AzerEnergy JSC is the country s largest power producer and also holds the leading position in number and length of distribution networks and TL. It is the biggest organization in its sphere in terms of production, transmission, distribution and supply of electric power and thermal electric power. In addition, it was formerly responsible for the national grid and electricity supply across Azerbaijan (with the exception of Baku, which is supplied by Bakielektrikshabaka (BES) JSC). 16 However, pursuant to a Presidential order (February 2015) Bakielektrikshebeke JSC (electricity distribution in Baku) was renamed Azerishig JSC. According to this order, the role of Azerenerji JSC in providing consumers with electricity was transferred to Azerishig JSC. Through the purchase and sale of electricity, Azerishig JSC will be engaged in ensuring reliable, safe and effective electricity supplies to consumers, using new technologies, modernizing its technical base, and other activities aimed at developing this sector. 14 SOCAR, About SOCAR [Online] Available at: [Accessed 15 Jan. 2015] 15 SOCAR, Azerigaz Production Union [Online] Available at: [Accessed 15 Jan. 2015] 16 Azerenergy, About Azerenergy [Online] Available at: 99&Itemid=106&lang=en [Accessed 15 Jan. 2015] 16 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

17 5. SECTORAL OVERVIEW OF ENERGY EFFICIENCY 5.1 General Overview Question: How does Azerbaijan meet its energy demands? Energy is and will remain a key basis for the economies of many industrialized countries around the world. Trade and industrial sectors can reduce energy consumption in the future without risking productivity. Within this context, it is worth noting that energy efficiency equates to cost efficiency, a clear competitive advantage. There is a significant potential for energy efficiency through improved procedures and measures across all sectors of the economy. FIGURE 3: Primary energy production (%, ) Source: The State Statistics Committee of the Republic of Azerbaijan and own construction FIGURE 4: Final consumption of energy products (%, ) Source: The State Statistics Committee of the Republic of Azerbaijan and own construction VOLUME 15, JULY

18 FIGURE 5: Final energy consumption by active types of economy (%, ) Source: The State Statistics Committee of the Republic of Azerbaijan and own construction The figures above highlight the country s energy demand and supply during the years As shown by Figure 5 -- final energy consumption by active types of economy, energy consumption by households, transport and industry & construction were in the top positions. According to the figures above, it should be noted that in order to achieve sustainable development, the share of renewables in the final production of energy products should be increased. In final energy consumption by sectors such as households, transport and industry & construction - which consume the most energy - energy efficiency potential should be calculated, and energy efficiency measures to reduce the cost of energy should be implemented. FIGURE 6: Commodity balance of electricity Indicator Production (million kw/h) ,7 Import (million kw/h) ,1 Export (million kw/h) ,3 Stoks changes (million kw/h) Total energy supply (million kw/h) ,5 Statistical difference (million kw/h) ,3 Transformation processes (million kw/h) Energy industries own use (million kw/h) ,4 Losses (million kw/h) ,5 Final consumption (million kw/h) ,3 Source: The State Statistics Committee of the Republic of Azerbaijan and own construction 18 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

19 Figure 6 shows commodity balance of electricity in the country. It is worth highlighting the percent of growth in electric power production for January 2015 compared to the previous year. FIGURE 7: Final electricity consumption by sectors (%, 2014) Source: The State Statistics Committee of the Republic of Azerbaijan and own construction Figure 7 shows the final electricity consumption by sectors in the country. As the Figure above shows, households, commerce & public service and industry & construction are the main electricity consuming sectors. The improvement of energy efficiency in those sectors requires an energy audit and management for commercial, industrial, institutional buildings and large residential developments. 5.2 Households In 2014 energy consumption in households accounted for around 39% of all energy consumed in the country. This is by far the greatest share of total energy consumption, ahead of transport and industry and construction. It is worth noting that around 85% of the energy consumed in this sector is attributed to heating, cooling and hot water generation, which means that the potential for energy savings is huge. For example, in 2013 the share of this sector in final energy consumption by sectors was around thousand TOE. This shows that there is huge potential to save energy in this sector. Improvements can be made not only via heating and cooling systems and other technologies, but also in the area of insulation. VOLUME 15, JULY

20 FIGURE 8: Energy consumption in households (thsd. TOE, 2014) Source: The State Statistical Committee of the Republic of Azerbaijan and own construction Figure 8 illustrates energy consumption in households by type of fuel: with 75%, natural gas took the top position. Energy consumption in buildings is very high in Azerbaijan. However, energy efficiency in buildings is lower than in European states. Soviet era norms and standards remain prevalent in many today s national construction industry. 17 These norms and standards are far below current energy efficiency standards and targets. Thus old buildings from Soviet times need to be insulated, and meanwhile new buildings must be constructed according to high energy efficiency standards. For example, in the new EU energy strategy (Energy 2020), energy efficiency is listed among the first five priorities: 20% energy savings to be achieved by Within this context, problems in buildings are also connected with the factors such as the fact that Azerbaijani construction companies have far less interest in energy efficient technology than their European counterparts; the same is true for energy-efficient appliances among consumers. As mentioned above, the majority of buildings in the country do not meet energy efficiency standards; however new buildings such as the Heydar Aliyev Center, the new buildings of SOCAR and the State Oil Fund of the Republic of Azerbaijan (SOFAZ) which meet all energy efficiency standards. For example, the SOFAZ administrative building has a double skin façade with Photo Voltaic panels at roof level. It was designed to comply with sustainability and energy efficiency requirements ( green building BREEAM Certification). 18 It is important to apply at least minimum energy efficiency standards to all construction projects in the country. 17 SAM-ın İcmalı, Azeərbaycanda Enerji Səmərəliliyi; Dövlət sektoruna aid binalarda səmərəli enerji satınalmalarına dair yol xəritəsi 12, Bakı, December 2013, səh SOFAZ, General information; New Administrative Building of the State Oil Fund of the Republic of Azerbaijan [Online] Available at: [Accessed 25 Jan. 2015] 20 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

21 PICTURE 1: Heat loss and insulation (thermal image) Good insulation Bad insulation The picture above illustrates good insulation versus bad insulation. Of course, it demands certain initial outlay, but insulation is cost-effective in general. Buildings with low energy efficiency performance need to be insulated. Main barriers A great deal of time and effort has been invested in addressing the market barriers that inhibit greater investment in energy efficiency technologies and practices in the construction sector. There are several well-known barriers such as split incentives, asymmetrical information, higher first costs, etc. 19 The main barriers in Azerbaijan are: Information gaps: Poor public awareness of the performance of energy-efficient technologies. Companies do not have enough information about energy efficiency potential, and consumers tend not to change their energy consumption behavior if little information is provided; Attitudes toward energy efficiency: Improved access to information and changed attitudes toward energy efficiency could greatly affect energy-related purchases and consumption behaviors among end-users; Codes and standards should be applied and reviewed, as well as regularly evaluated. Standards should be performance-based rather than prescriptive; Weak legal framework and shortage of staff to research energy-saving opportunities and handle energy efficiency demand as the uncertainty drives contractors away from equipment without oversight; and Limited access to capital: Consumers often face high up-front costs for energy-efficient systems. Preferential credits and loans for energy efficiency projects and technologies. 19 American Council for Energy Efficient Council, Cryptic Barriers to Energy Efficiency [pdf], 29 Aug VOLUME 15, JULY

22 Additional measures to improve energy efficiency 20 Light technology (e.g. intelligent light control, highly efficient illumination); Heat insulation (e.g. energy-efficient products and components); Heat distribution (e.g. pumps), heat emission (e.g. radiators and underfloor systems); Combined heat and power generation; Air-conditioning technology; and Renewables. 5.3 Transport sector Energy consumers in this sector share many similarities with those in the industrial and residential sectors. The transport sector is one of the largest sources of CO 2 emissions and has the second highest share in the country s final energy consumption, after households. The share of this sector in final energy consumption was around 31% in FIGURE 9: Energy consumption & distribution of energy resources in transport (thsd. TOE, 2014) Source: The State Statistics Committee of the Republic of Azerbaijan and own construction Figure 9 shows that the largest share of energy consumed in this sector is through motor gasoline. Thus, in order to increase energy efficiency, it is crucial to introduce fuel economy standards and eliminate the existing barriers to efficiency. Cars have become the main means of passenger and goods transportation in the country, and in the short term, air quality problems will still pose significant challenges to this sector. The proportion of energy consumed in road transport is high compared with other modes of transport. 20 Federal Ministry of Economics and Technology, 2010 Energy Efficiency Made in Germany, Berlin 22 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

23 FIGURE 10: Goods transportation in the transport sectors ( ) Source: The State Statistics Committee of the Republic of Azerbaijan and own construction Figure 10 shows goods transportation in the country. In the past few years, road transport has increased proportionally, and it took the top position in FIGURE 11: Conveyance of passengers in transport sectors ( ) Source: The State Statistics Committee of the Republic of Azerbaijan and own construction Figure 11 shows passenger transportation in the country. The share of the passenger transportation in this sector is quite high. Within this context, it is worth noting that road VOLUME 15, JULY

24 transportation accounts for more than 80% of passenger transportation. After road, metro (12%), railway, air and sea are next. 21 Problems in transport sector include: Around 51% of the vehicles are older than 13 years and so fuel efficiency is poor. Additionally, drivers are not interested in driving fuel-efficient vehicles, but prefer to drive older less efficient vehicles; The number of private cars is growing year by year, and as a result, there is an increasingly shift from public transportation to private cars; and There are major problems with the public transportation system. Most of the vehicles on Azerbaijani roads are either imported from CIS countries, and therefore, inefficient, or used cars from Europe. These factors cause air pollution and noise. In order to improve energy efficiency in transport sector, the recommendations are submitted: Improve efficiency of operations in public transport - as this sector is often perceived as less attractive for users in terms of the quality and services provided, then these issues need to be addressed with policy measures. Eliminate all existing problems and shift to card payment system; Restrict import of older vehicles (manufactured in the EU after 2008) as well as utilization of old vehicles (manufactured before 2000). Additionally, promote imports of energyefficient vehicles with the Euro-4 ecological standard; the government can reduce import tax on such vehicles. Mainstreaming of hybrid drive technology -- whereby a vehicle is initially accelerated by an electrical motor before the diesel engine takes over has great potential for cars and urban buses; and Public awareness is also an effective mechanism for increasing energy efficiency in the transport sector. It is very important to improve the efficiency of the public transportation system and to encourage population to use public transport more often. In conclusion, it is worth mentioning that Azerbaijan has already introduced import restrictions, under which only cars that meet the Euro-4 ecological standard can be imported. According to the regulation, only cars manufactured in the EU since 2005, United States since 2004, Japan and China since 2011, Korea since 2006 and Turkey since 2009 can be imported to Azerbaijan. 22 This measure was important step to improve general situation in this sector. The sale of Tesla cars at the GreenCar center of electric vehicles in Baku is aimed at protecting the environment and supporting environmental initiatives. However, remission of import duties, tax credit and other initiatives are still needed in order to make electric cars more cost effective than traditional cars. The availability of such cars will improve air quality, reducing carbon emissions in the capital city. 21 In road transportation; 91% bus, 9% taxi ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

25 5.4 Industry As mentioned in the previous section, the State Program for the Development of the Fuel and Energy Sector ( ) identifies and sets development targets for energy efficiency based on a long-term planning perspective. Energy efficiency in the industrial sector contributes to decoupling economic growth and environmental impact while reducing industrial energy intensity and improving competitiveness. Therefore, improving energy efficiency in industry is one of the most cost-effective measures to help supply-constrained developing and emerging countries meet their increasing energy demand, and loosen the link between economic growth and environmental degradation (e.g. climate change). 23 Industry has the third highest indicator in terms of final energy consumption after households and transport in Azerbaijan. As noted above, state policy on usage of energy resources is based on law of the Azerbaijan Republic on Utilization of Energy Resources. Under the law, industrial facilities and public buildings should be provided with the equipment regulating and registering the energy resources usage. 24 Over the past few years, industrial companies have implemented energy-efficiency measures, especially via production equipment upgrades. Companies in food and machinery-producing industry have mainly invested in supply-chain energy efficiency. FIGURE 12: Final energy consumption trend in industry & constriction ( ) Source: The State Statistics Committee of the Republic of Azerbaijan and own construction Figure 12 highlights energy consumption trends in industry & construction over the past few years. In general, industrial energy consumption performance improved significantly compared the 1990s. 23 United Nations Industrial Development Organization, UNIDO and Energy Efficiency; A low-carbon path for industry [pdf], Vienna, 2009, pp Law of the Azerbaijan Republic on Utilization of Energy Resources, 1996 [Online] Available at; html [Accessed 25 Jan. 2105] VOLUME 15, JULY

26 The year 2014 was announced as the Year of Industry in a Presidential Decree. Looking at Azerbaijan s economy, the country can be characterized as an industrial country with a developing agricultural industry. The manufacturing industry is primarily comprised of the oil and gas sector as well as the three fields of engineering, metallurgy and electro-energy. During the Year of Industry, development of industrial production was high on the agenda. For example, 31.9 milliard AZN worth of products were produced by industrial entities of the country million tons oil and 18.7 milliard cubic meters of marketable gas and other products were produced in mining sector, with 69.6% of the industrial product. The volume of production in the processing sector was formed 24.0% of total industry output. Growth was observed mainly in the production of food products, beverage, tobacco products, weaving, clothing, chemistry, construction materials, metallurgy, ready metal products, electric equipment, automobile and trailers, and other transport means. 25 In general, industrial output has grown by 2.7% and investment in the industrial sector has more than doubled over the last decade. All these measures have been aimed at turning the country into a strong industrial country in the region. Through state programs, the government has started building technological parks. These programs promote the creation of new, competitive industrial facilities as well as the delivery of advanced technologies. Industrial parks attract innovative businesses, leading to both more jobs and a larger tax base. For example, Sumgait Technologies Park was launched by the President Ilham Aliyev in All the production facilities are equipped with the most advanced technological equipment manufactured in Europe, with raw materials imported from leading European countries. All the factories are equipped with latest laboratories, manufactured predominantly in Western Europe and accredited to AZS ISO/IEC standard. Manufactured products have certificates of compliance where the Quality Management System has been certified to ISO FIGURE 13: Final energy consumption of industry & construction by type of fuels (2014) Source: The State Statistics Committee of the Republic of Azerbaijan and own construction 25 The State Statistics Committee of the Republic of Azerbaijan, Industry in Sumgait Technologies Park, 26 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

27 Figure 13 shows the net energy consumption of industry & construction by type of fuel in Natural gas was the main fuel, and it constituted the major part of energy used in industry, with a share of 74%. The share of electricity in industrial consumption was about 21% and petroleum products made up about 5% of the net consumption. Despite these various positive developments in the country s industrial sector, there are several barriers that impede and even prevent potential developments in this sector. TABLE 3: Some barriers to energy efficiency 27 Barrier Risk Lack of information Hidden costs Access to capital Claim The short payback terms of energy efficiency investments may represent a rational response to risk. This could be because energy efficiency investments represent a higher technical or financial risk than other types of investment. Lack of information on energy efficiency opportunities may lead to cost-effective opportunities being missed. In some cases, inaccurate information could cause inefficient products to squeeze efficient products out of the market. Engineering-economic analyses may fail to account for either the reduced functionality or additional costs associated with energy efficient technologies. Examples of hidden costs include management overhead costs, disruptions to production, staff replacement and training, and the costs associated with gathering, analyzing and applying information. If an organization has insufficient internal funds, and has difficulty raising additional capital through borrowing or share issues, energy efficient investments may face barriers. In general, the well-known obstacles mentioned above relate to energy efficiency in Azerbaijani industry; therefore, the elimination of those barriers will improve energy efficiency. Consequently, companies will be able to produce goods at lower costs, and the market will be more competitive. Additional measures for improving energy efficiency: 28 improved heat insulation reduced heat radiation adjusted busy times and operating times basic progress design optimized power, pressure and temperature levels efficient control technology 27 United Nations Industrial Development Organization, Barriers to industrial energy efficiency: A literature review [pdf], Vienna, 2011, pp Federal Ministry of Economics and Technology, 2010 Energy Efficiency Made in Germany, Berlin VOLUME 15, JULY

28 6. RENEWABLE ENERGY Use of renewables by different countries varies depending on location as well as regional characteristics. For example, the use of photovoltaic panels is widespread in Germany and Israel. Israel plans to increase the share of renewables to 10% of electricity generation by The installed capacity for solar domestic hot water supply in this country is high. Germany has achieved great success in using solar and wind power in electricity production. The share of solar power in the country s electricity production rose to 6.9% (32.4 TWh), and the share of wind power was equal to 42.6 TWh during the first eleven months of The energy sector plays a key role in the economy of the Republic of Azerbaijan. Driven by its natural resources - crude oil and natural gas - the country s energy production is strongly tied to fossil fuels. However, there is huge potential to develop alternative and renewable energy sources. FIGURE 14: RES potential in Azerbaijan Source: SAARES Figure 14 illustrates the country s renewable energy potential. The national renewable energy policy of the country is set forth in The State Program on Use of Alternative and Renewable Energy Sources ( ) which focuses on diversifying the sources of primary energy and ensuring energy security, in particular with reference to small hydropower and wind power potential in order to improve access to energy in rural and remote areas. The government is committed to creating a long term legal framework, and is implementing various policies to attract investment. The preparation of a National Strategy on the Use of Alternative and Renewable Energy Sources for the years by SAARES and the Ministry of Energy marks an important step in this direction. Azerbaijan s 2020 targets include the following: Fraunhofer Institute for Solar Energy Systems Ise, Electricity production from solar and wind in Germany in 2014 [pdf] Dec. 29, 2014, Freiburg, Germany, 30 United Nations Industrial Development Organization (UNIDO) and International Center, World Small Hydropower Development Report 2013 [pdf], pp ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

29 Identification of potential of renewable/alternative energy sources; Increased energy efficiency; Creation of new employment opportunities; and 20% share of RE in electricity; 9.7% share of RE in all energy consumption; 2,000 MW of installed RES capacity by According to the Strategy, the government intends to increase the share of renewable energy sources to 9.7 % of total energy consumption by 2020, which is about three times higher than today s indicator. FIGURE 15: RES Target for 2020 Source: SAARES and own construction Figure 15 shows the key sources of renewable energy with regard to the 2020 target. Within this context, onshore and offshore wind farms/clusters, solar power, hydro and biomass/solid wastes will be priorities. The potential for solar and wind power generation is especially significant. The possibilities for wind power development are very strong in the country, especially on the Absheron peninsula, the Caspian coastline where the wind speed ranges from 7.9 to 8.1 m/sec. the Western region of the country (Ganja-Daskesen) and Nakhchivan AR (Sharur-Julfa) offer ideal conditions for the efficient operation of wind turbines. The country has around 800 MW of wind power potential, which could mean roughly 2.4 billion kwh of electricity or up to 1 million tons of standard fuel saving Dr. R. Baker and Dr. E. Safarzade, A Roadmap for Renewable Energy in Azerbaijan [pdf], ADB, 2009 pp.15-17, VOLUME 15, JULY

30 Azerbaijan s climate conditions are also offers major potential for the production of electric and heat energy via solar power. The efficiency of solar stations depends on a country s climate and geography. For example, in Azerbaijan the possibilities for the solar power development are strong in the Absheron peninsular as well as in Nakhchivan AR and the Mil-Mughan region. The annual number of sunshine hours in the country is equal to hours, equal to kwh/m2 annually. 32 In order to stimulate use of alternative and renewable energy sources, the following important measures have also been taken: Presidential Decree (2001) On privatization of small Hydroelectric Power Plants was approved, and operational small hydropower plants such as Sheki, Mughan, Zeykhur, Gusar, Nyugedi, Chinarly, Balakan, Guba and Zurnabad were offered for privatization; Decree of the Cabinet of Ministers of the Republic of Azerbaijan (2005) on imports of wind appliances and their parts are exempt from customs duties and VAT. 33 As mentioned in the previous section, according to Tariff Council, the wholesale price of electricity produced by private small hydropower stations (i.e. hydropower stations with a generation capacity of 50 to kw) is AZN per kw/hour. The wholesale price of electricity produced by wind power stations is AZN. There is also a feed-in tariff for wind-based electricity (some 10% higher than the regular tariff). Regular tariffs apply to all other RES-based plants (for private small HPPs the tariff is even lower). 34 However, despite the huge potential for renewables, the share of renewables in electricity was 10% (9.8 % hydropower and 0.2% other RE), and in total, energy consumption was 2.3% in TABLE 4: Tariff rates for electricity producers and customers Producer/customer category AZN/KWh Small hydro Wind plants All other producers (including solar plants) All customers Source: 32 Ibid 33 United Nations Industrial Development Organization (UNIDO) and International Center, World Small Hydropower Development Report 2013 [pdf], pp Regional Environmental Center for Central and Eastern Europe, Studies prepared under the project Promoting Green Economy in GUAM Countries: Promotion of Renewable Energy Sources Azerbaijan, Georgia, Moldova, Ukraine [pdf], Pp State Agency for Alternative and Renewable Energy Sources, Renewable Energy Strategy of the Republic of Azerbaijan [pdf] Available at: 30 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

31 Existing barriers to development of renewable energy in Azerbaijan include: Weak legal framework as well as supporting instruments, and under-promotion of development of renewable energy sources. Existing laws and measures do not attract foreign investors. In order to attract significant private investment in this sector, the adoption of additional measures including larger feed-in tariffs and fiscal incentives as well as smoothing and facilitation of administrative procedures is highly recommended; Insufficient financial and credit mechanism for purchase and installation of renewable energy sources technologies (lack of new technologies and the high cost of existing tools); Poor public awareness; people lack information about the economic prospects and competitiveness of the industry; and Shortage of experienced specialists in this sphere. In conclusion, it is also worth mentioning that the government already considers development of renewable energy as one of the key objectives of the state energy policy. To this end, SAARES, the principal regulatory institution in the sphere of alternative and renewable energy, was established. It collaborates with the European Commission, UNDP, IRENA World Bank, Asian Development Bank etc. to promote the development of sustainable energy in Azerbaijan. One key project is the Experimental Polygon and Training Center in Gobustan, which provides special training to employees on the implementation of alternative energy technologies, with 5.5 MW installed capacity of hybrid sources -- wind (2.7 MW), solar (1.8 MW) and biogas (1 MW). Another important project is the Azguntech solar panel producing plant in Sumgayit, established by SAARES, which produces solar panels a year. 36 The Agency is also the central implementing body of the National Strategy for the Use of Alternative and Renewable Energy Sources for the period of The successful implementation of the National Strategy will contribute to developing of a green economy, building a new low-carbon development model in the country VOLUME 15, JULY

32 CHAPTER 2 Germany - A Champion in Energy Efficiency Zefi DIMADAMA & Alexia TIMOTHEOU 1 1. INTRODUCTION The current context of rising energy prices and resource scarcity has forced nations to realize that their competitiveness and prosperity are highly dependent on the prudent and efficient use of energy. Germany imports the majority of its energy resources, and at the same time, it is particularly focused on conserving these resources. It is worth mentioning that in 2007, the country s total primary energy consumption achieved its lowest value in more than 25 years, even though the gross domestic product had more than doubled during this same period. 2 When it comes to energy efficiency and related technologies, Germany is certainly a champion. According to the American Council for an Energy-Efficient Economy (ACEEE), Germany holds the top ranking in the 2014 International Energy Efficiency Scorecard. The country s excellence in this field is also reflected in the particularly high degree of patent applications submitted in the area of energy efficiency; from 2002 until 2004, 30-40% of the global patent applications were submitted by German researchers and companies. For example, the global market for condensing boiler technology, which is deployed in gas and oil central-heating boilers and achieves of almost 100% efficiency levels, is served almost exclusively by the German heating industry. 3 The implementation of an integrated energy strategy, widely known as Energiewende, has contributed to Germany s position as world s most energy-efficient economy. This term, literally meaning energy turn, describes Germany s transition from fossil and nuclear fuels to clean renewable energy sources, representing the country s ambition to restructure its energy sector. The government s primary goal was to increase energy security and reduce import dependency. Although it is not a new concept - it first emerged in the 1970 s - Energiewende became an official policy when the Social Democrats formed a coalition government with Greens, promoting nuclear phase-out as one of their primary objectives. In response to the 2011 Fukushima nuclear plant disaster in Japan, German Chancellor s Angela Merkel s government immediately closed down eight nuclear plants in Germany, 1 Zefi Dimadama, Regional & Environmental Economist, PhD, Expert on Energy and Environmental Policy, and Alexia Timotheou, Expert in Environment and Sustainable Development 2 Federal Ministry for Economic Affairs and Energy, ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

33 and announced the closure of the remaining plants by The government underlined that the country s target is a 20% reduction in primary energy consumption by 2020, and 50% by 2050 (against 2008 levels). 4 The first part of this paper presents the energy efficiency policies and measures implemented in Germany. As an EU member state, Germany has incorporated European Directives, but additionally, as a pioneer in this field; the country has set its own innovative targets, aimed at restructuring its energy sector and addressing the prevailing challenges. This section concludes with an outline of lessons learned and best practices drawn from the German approach. The second part of the paper presents an analytical assessment of the German KfW Investment Program, widely considered as a successful scheme. The national development bank (KfW) offers low interest loans to homeowners and landlords for new building projects and refurbishments that meet energy efficiency criteria. This case study offers not only lessons learned, but also discusses challenges that can be avoided. The third and final section will explore potential avenues of cooperation between Germany and Azerbaijan in the sphere of energy efficiency. Similar successful energy partnerships have already been formed between Germany and other countries (for example, with Norway and Russia). In this framework, the paper will present how other states, i.e. Azerbaijan, could benefit from Germany s technological achievements and knowledge base, demonstrating how this knowledge exchange and expertise could benefit Azerbaijan s sustainable development and competitiveness. 2. ENERGY POLICY IN GERMANY The European Framework on Energy Efficiency The European Union (EU) recognizes that energy efficiency needs to be increased at all stages of the energy chain, from generation to final consumption. This translates into lower energy bills for European consumers, reduced dependence on external suppliers of oil and gas, and protection of the environment. In this framework, the EU has set itself a 20% energy savings target by 2020, against the projected use of energy in 2020, and is promoting specific policies to improve energy efficiency (see Box 1). At a recent EU summit in October 2014, European countries agreed on a new energy efficiency target of 27% or higher by The European Commission had proposed 30% in its Energy Efficiency Communication, Communication from the Commission to the European Parliament and the Council, Energy Efficiency and its contribution to energy security and the 2030 Framework for climate and energy policy, , COM(2014) 520) VOLUME 15, JULY

34 BOX 1: EU policies to improve energy efficiency 6 An annual reduction of 1.5% in national energy sales; EU countries making energy efficient renovations to at least 3% of buildings owned and occupied by central governments per year; Mandatory energy efficiency certificates accompanying the sale and rental of buildings; Minimum energy efficiency standards and labelling for a variety of products such as boilers, household appliances, lighting and televisions (EcoDesign); The preparation of National Energy Efficiency Action Plans every three years by EU countries; The planned rollout of close to 200 million smart meters for electricity and 45 million for gas by 2020; Large companies conducting energy audits at least every four years; Protecting the rights of consumers to receive easy and free access to data on real-time and historical energy consumption: More specifically, the 2012 Energy Efficiency Directive (EED) establishes a set of binding measures aimed at helping the EU reach its targets. 7 Under this Directive, all EU countries are required to incorporate the Directive s provisions into their national laws and promote measures to ensure major energy savings both for consumers and industry. Some of these measures are detailed below. BOX 2: Measures to promote energy savings 8 Energy distributors or retail energy sales companies have to achieve 1.5% energy savings per year through the implementation of energy efficiency measures; EU countries can opt to achieve the same level of savings through other means such as improving the efficiency of heating systems, installing double glazed windows or insulating roofs; The public sector in EU countries should purchase energy efficient buildings, products and services; Every year, EU governments will carry out energy efficient renovations on at least 3% of the buildings they own and occupy by floor area; Empowering energy consumers to better manage consumption. This includes easy and free access to data on consumption through individual metering; National incentives for SMEs to undergo energy audits; Large companies will make audits of their energy consumption to help them identify ways to reduce it; Monitoring efficiency levels in new energy generation capacities: 2.1 Germany s approach With the introduction of the Energy Concept in 2010, the Federal Government of Germany set ambitious goals for energy and climate policy. This scheme established long-term policies to restructure the country s energy system while remaining a competitive economy. According Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

35 to the Energy Concept, greenhouse gas emissions are to be cut by at least 80% by 2050 compared to 1990 levels. Second, renewables are to supply the bulk of German energy in the future. And third, energy consumption is to be reduced considerably, and energy efficiency increased. 9 In order to achieve these targets, the country adopted a comprehensive legislative package in 2011, known as the Energy Package. The Federal Cabinet, the Bundestag and Bundesrat (Germany s upper and lower houses) passed six laws and one ordinance, mainly focused on grid expansion and the on-going development of renewable energy. BOX 3: Goals of the Federal Government s Energy Concept 10 The Energy Concept plans to cut greenhouse gas emissions by 40 % by 2020, and by at least 80 % by 2050 as agreed by the industrialized nations; Renewables are to be expanded to become the mainstay of energy supply. The aim is to increase their share in gross final energy consumption from roughly 10 % in 2010 to 60 % in The share of renewables in electricity supply is to grow to as high as 80 % by 2050; The government seeks to reduce energy consumption over the long term. Compared to 2008 levels, there is to be a 50 % reduction in primary energy consumption by On average, this demands a 2.1 % annual increase in energy productivity relative to final energy consumption; By 2050, electricity consumption is to drop 25 % compared to 2008, and should already be down 10 % by Final energy consumption in the transport sector is to be reduced by around 40 % by 2050 compared to 2005 levels; The annual rate of energy retrofits for buildings is to be doubled from current levels, from one to two percent of existing buildings per year: BOX 4: Energy Package six laws and one ordinance 11 Act to Restructure the Legal Framework for the Promotion of Electricity Generation from Renewable Energy Sources, including the 2011 firsthand report on the Renewable Energy Sources Act; Act on Measures to Accelerate the Expansion of the Electricity Grid; Act to Restructure Provisions of the Energy Industry Act; Act Amending the Act to Establish a Special Energy and Climate Fund; Fourth Ordinance amending the Ordinance on the Award of Public-sector Contracts; 13th Act to Amend the Atomic Energy Act; Act Strengthening Climate-Friendly Measures in Towns and Municipalities: In order to comply with European Directive 2012/27/EU, the German government prepared the 3 rd National Energy Efficiency Action Plan (NEEAP) It is worth mentioning that even before the adoption of this Directive, Germany had already implemented a spectrum of measures and instruments to increase energy efficiency, achieving a visible separation between economic growth and energy consumption. For Germany, increasing energy efficiency is one of the primary targets in the transition to a new energy era (Energiewende). Through the 9 Federal Ministry of Economics and Technology (BMWi) 2012, Germany s New Energy Policy 10 Ibid. 11 Federal Ministry of Economics and Technology (BMWi) 2012, Germany s New Energy Policy VOLUME 15, JULY

36 NEEAP, the Federal Government has introduced a series of measures aimed at increasing energy efficiency in recent years. Germany is implementing a range of instruments to increase energy efficiency in accordance with the 2020 targets, such as regulatory conditions, fiscal policy provisions, funding programs, information and advice. Some of the main tools include: 12 Additional funding for energy-related building renovation (CO 2 building renovation program) Program to promote energy management systems in businesses Program to promote energy-efficient and climate-friendly production processes SME initiative for energy transition Reform of the peak equalization scheme in the Energy Tax and Electricity Tax Acts Amendment of the Energy Savings Regulation (EnEV) Amendment of the Energy Savings Act (EnEG) Mobility and fuel strategy (MKS) 2.2 Sectoral overview of energy efficiency It is useful to provide an overview of the German energy efficiency policies in different sectors, in order to assess the comprehensiveness and adequacy of the measures implemented to date. The Energy-Efficient-Watch project s country report for Germany provides a helpful assessment of Germany s energy efficiency action plans and policy implementation in the public sector, residential buildings, appliances, industrial and service sector, and transport sector. In the public sector, several measures have been implemented in order to improve energy efficiency. For example, there are measures addressing public buildings, such as energy audits, building requirements, funding and investment programs and advice projects. There are also provisions and specific guidelines for green procurement of IT equipment. Several campaigns and information activities have been launched, although their public communication could be strengthened. Overall, the policy design, which targets a range of different actors, is deemed adequate. Regarding residential buildings, there are several regulatory policies, economic incentives and instruments (programs by the KfW), geared towards energy-efficient refurbishment. The government has also introduced the Minimum Energy Performance Standards for old and new buildings and the mandatory Energy Performance Certificates. Major effort has being made in regard to information, advice and education activities, aimed at motivating end-users and professionals. However, the NEEAP does not mention any specific training programs for 12 Measures described analytically in the 3rd NEEAP 2014 for the Federal Republic of Germany 36 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

37 building professionals. Overall, the policies for the residential sector consist of a balanced mixture of legislation, information and economic incentives, encompassing a variety of different actors. Within the residential sector, a key issue for energy efficiency is appliances. Germany has introduced voluntary and obligatory labeling schemes in order to better inform end-users, along with several information programs to promote energy efficient appliances. It is also worth mentioning that an energy saving check has been established for low-income households, within the framework of education and training. However, the NEEAP does not mention any economic incentives in this area. Concerning the industrial and service sector, the energy efficiency policy mainly relies on subsidies and other economic incentives. There are several funds for research and innovation on energy saving technologies, implementation of energy saving measures and support for audits. The EU Emission Trading System and the Ecodesign Directive are being implemented and energy taxes for gas and electricity are in place. Within the NEEAP these measures are not accompanied by specific regulations and obligations; targets are voluntary. The report also criticizes the energy tax exemptions for industrial companies. Within the transport sector, there are strong economic incentives, such as taxation (e.g. for fuel efficiency) and tolls. The main emphasis is on the implementation of EU regulations, the national cycling plan and the fuel strategy. The awareness-raising component aims to change the overall mobility behavior, achieving more sustainable attitudes. It addresses several actors for this purpose. The NEEAP has no provisions for public or private transport The building sector: A detailed review Particular attention should be paid to the built environment, a sector in which a large part of the energy usage is wasted through windows, walls, roofs, floors, doors and inefficient equipment. Therefore, this constitutes a good starting point for energy saving. Germany s success in increasing energy efficiency in buildings is primarily dependent on an innovative three-tier approach: 1) A strict and clear legislative framework The first pillar includes the legal framework for limiting energy demand. The main legal tools are: The amended (in 2014) Energy Savings Regulation (EnEV), which foresees a one-off 25% increase in the energy efficiency requirements for new buildings from 1 January It also highlights the importance of the energy performance certificate and inserts energy efficiency classes for buildings promoting transparency in the real estate market. The legislation is periodically revised to make standards more stringent in line with technological improvements. Planning permission for new buildings and major refurbishments is contingent on meeting minimum standards. The Heating Costs Act (HeizkostenV), regulating the cost of heating and warm water in rented properties. As renters make up 60 percent of German households, these changes are VOLUME 15, JULY

38 significant. Tenants must now pay a much higher proportion of heating charges based on consumption, creating bigger incentives for them to save energy, and for their landlords to adopt energy saving measures. 13 The Renewable Energy and Heat Act (EEWarmeG), which increases the share of renewable energy for heat in new buildings. The Renewable Energy Sources Act (EEG), which sets a target for electricity from renewables. Energy providers pay renewable suppliers a fixed payment per kilowatt-hour, known as the Feed-in Tariff, which is then passed on to end-users. The act has attracted major investment into renewable technologies and created a strong export market. 14 2) Strong financial incentives for energy saving The second strand refers to federal or local programs and incentives given for energy saving purposes. It should be noted that Germany s strongly federalist government system entailed decentralized powers at the regional and local levels. Programs by KfW (Kreditanstalt fur Wiederaufbau). KfW is the investment bank of federal and regional governments and the main funder of investments in energy efficiency and renewable energy. KfW offers low interest for new building projects and refurbishments meeting energy efficiency criteria. 15 In addition to offering loans, KfW also offer grants for broader environmental initiatives such as waste management and air pollution control. 16 Regional and local programs, introducing measures for energy saving in buildings. 3) Provision of information and awareness Special emphasis is placed on information, transfer of knowledge and know-how, changing attitudes and promoting environmental awareness through a variety of activities. The German Energy Agency (DENA) is a center of expertise for energy efficiency, renewable energy and intelligent energy systems. It provides information, runs promotional campaigns, provides training, establishes and maintains standards, and develops and promotes model projects. The federal government emphasizes the importance of consulting with households and consumers. The Federal Ministry for Economic Affairs and Energy has established approximately 670 consumer center offices in order to help consumers with their energy questions. Another service is the energy check, a program allowing tenants and house owners to bring in experts to examine their homes for energy conservation opportunities, at no cost (available to low-income households). Several consulting and funding programs for companies and buildings are also envisaged. 13 Power A. and Zulauf M. (2011), Cutting Carbon Costs: Learning from Germany s Energy Saving Program, What Works Collabotive, Building Knowledge & Sharing Solutions for Housing & Urban Policy, p Ibid. 15 The KfW programs will be analytically described in the next chapter ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

39 2.3 Lessons learned Germany s overall approach in reducing energy consumption has positioned it as a global leader among countries trying to improve their energy efficiency. Although it is not possible to transpose every aspect of the German approach to other countries, it is useful to draw some lessons for those willing to follow a similar path. a. Germany has adopted a three-pillar comprehensive strategy for increasing its energy efficiency, giving equal focus to the three most vital axes of action: a clear framework of regulation, financial support and raising awareness. This approach proved successful in generating a clear message about the country s decisive change and direction for the future. b. The German schemes provide top quality expert advice, in order to achieve high standards and the energy efficiency outcomes that were initially promised. c. The German approach provides strong financial incentives to attract potential investors, but through repayable loans on favorable terms, rather than straight subsidies or tax concessions; this is a more reliable and sustainable funding mechanism. 17 d. Linking renewable energy generation to energy-saving measures by requiring investments in energy efficiency before subsidies for renewable energy are paid (e.g. through the feedin tariff) both increases the proportionate contribution renewable energy can make to meeting overall demand, saves the householder money, makes a bigger contribution to the wider goal of climate protection, and provides a more coherent overall message to the public about the need to reduce CO2 emissions. 18 e. Implementing innovative energy efficiency tools in public buildings (e.g. schools) entail good practice and attract public attention, raising awareness and making energy efficient projects more attractive. 3. BEST PRACTICE PRESENTATION Germany is considered a leading example in terms of its regulatory framework, incentives, financing, raising awareness and disseminating information. It is a world leader in renewable energy production and promotion of energy efficiency measures. Especially in the buildings sector, Germany is leading the way with its energy efficiency investments, having cut energy use in buildings in half since 2002, when the first energy efficiency building regulation (EnEV) came into force. 19 The 8000 retrofitted buildings across Germany demonstrate that it is possible to achieve a 30% reduction on energy conservation standards. 17 Power A. and Zulauf M. (2011), Cutting Carbon Costs: Learning from Germany s Energy Saving Program, What Works Collabotive, Building Knowledge & Sharing Solutions for Housing & Urban Policy, p Schroder M., Ekins P., Power A., Zulauf M., Lowe R. (2011), The KfW Experience in the Reduction of Energy Use in CO2 Emissions from Buildings: Operation, Impacts and Lessons for the UK, UCL Energy Institute, p Power A. and Zulauf M. (2011), Cutting Carbon Costs: Learning from Germany s Energy Saving Program, What Works Collabotive, Building Knowledge & Sharing Solutions for Housing & Urban Policy. VOLUME 15, JULY

40 In this context, KfW plays a crucial role. The development bank acts on behalf of the federal German government and finances energy efficiency measures targeting both supply and demand, seeking to address the major challenges in the energy efficiency field: High energy intensity and CO2 emissions due to old buildings Future energy shortages due to economic growth Gradually increasing energy tariffs Limited number of energy auditors Poor public awareness of energy efficiency 20 The measures promoted for the building (private households and public buildings) and the industry sectors are wide-ranging, from simple energy-efficient appliances to complex technical solutions. KfW operates through credit lines provided by local financial institutions for investment into energy-efficient products or buildings. 3.1 KfW programs More specifically, KfW offers low interest and long term loans to homeowners and landlords through intermediary commercial banks, for new building projects and refurbishments meeting energy efficiency criteria. The loans are supported and accompanied by expert, professional and independent advice. The commercial bank handles the credit application, takes the credit risk and concludes the credit agreement. KfW provides a refinancing loan to the commercial bank. To ensure that the commercial bank passes on the low interest rate to the householder, KfW sets and publishes a maximum interest rate, including the commercial bank s margin that can be applied as part of the scheme. 21 The loans can reach up to 75,000, and repayment starts after two years. When the applicant receives the loan, the KfW needs to be informed about the allocation of funds according to the terms of the contract. The current KfW programs are the Energy Efficient Rehabilitation Program (for existing buildings) and the Energy Efficient Construction Program (for new buildings). These are available to all building owners, including private individuals, housing enterprises, housing cooperatives, real estate agents, municipalities, local community associations, districts, civil groups and other establishments of public law. 22 These programs are intended to support either single measures (e.g. floor insulation, windows replacement, etc) or packages of measures, presented in the table below. The ultimate goals of the bank s programs are to reduce energy costs, reduce dependence on energy imports, contribute to climate protection and speed up market penetration of innovative efficiency technologies. 20 Zymelka O., Energy Efficiency Credit Lines, A proposal by KfW, Guertler P. and Royston S. (2013), Financing energy efficiency in buildings: an international review of best practice and innovation, A report to ADEME and the World Energy Council, Association for the Conservation of Energy, London, p ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

41 TABLE 1: Packages and measures supported by the KfW programs 23 Package 0 Measures - Retrofitted insulation on exterior walls - Retrofitted insulation on the roof - Retrofitted insulation of the basement ceiling or outside walls of heated rooms in contact with the ground - Replacement of existing windows Replacement of central-heating boiler - Retrofitted insulation of the roof - Retrofitted insulation on exterior walls - Replacement of central-heating boiler - Retrofitted insulation of the roof - Retrofitted insulation of the basement ceiling or outside walls of heated rooms in contact with the ground - Replacement of existing windows - Replacement of central-heating boiler - Change of heating energy carrier - Replacement of existing windows A combination of measures from package 0 to 3 - Proof of a 40kg reduction of CO 2 emissions per m 2 floor area and year through calculations by an accredited energy advisor - Replacement of a) decentralized furnaces fired by gas, oil or black coal, or b) night storage heaters, or c) black coal-fired central heating boilers with a heating system complying with the building code or - Replacement of standard oil- or gas-fired central heating systems installed before with oil- or gas-fired condensing boilers combined with solar thermal or other renewable energy sources (i.e. biomass) Both KfW programs include the KfW Efficiency House standard (KfW-Effizienzhaus), corresponding to the levels of building performance defined in the EnEV. The EnEV uses two different criteria to measure energy efficiency: the primary energy demand, which refers to the energy input required for heating and warm water of a building, and the specific transmission heat loss, referring to the quality of thermal insulation of a building. Within this framework, the KfW programs offer different levels of energy efficiency that can be achieved by the investor. For example, the KfW-Efficiency House 100 (or KfW-100) fulfills the EnEV energy efficiency requirements for new buildings, while a KfW-115 is 15% less energy efficient. The numbers indicate the demand of primary energy in relation to the new building level 23 Guertler P. and Royston S. (2013), Financing energy efficiency in buildings: an international review of best practice and innovation, A report to ADEME and the World Energy Council, Association for the Conservation of Energy, London. VOLUME 15, JULY

42 according to EnEV. Thus KfW-100 means that the maximum primary energy demand of the building is 100% of the demand permitted for new buildings according to the EnEV. In other words, the smaller the number, the higher the energy efficiency and the better the funding. 24 FIGURE 1: KfW Efficiency House Standard Results The KfW financing programs have given rise to several successful outcomes: 2.1 million homes had energy efficiency work funded through KfW loans between 2001 and 2011, accounting for 5.3% of German homes; 26 Around 27 billion in loans distributed, which equates to a total investment of more than 54 billion in energy efficient homes; 27 In 2011, for every 1 of public money spent on the energy efficiency programs, over 15 was invested in construction and retrofit, and more than 4 was returned to public finances through taxes and savings; 28 Energy use in buildings that benefited from the KfW programs has been cut by around half, resulting in estimated CO 2 reductions of 7.7 million tons per year since 2006; Pfliegner K. and Gumb G. (2012), Climate and Energy Policy in Germany: Mechanisms to encourage Private Sector Investment / Participation in Low-Carbon Development, a Case-Study developed for the OECD Roundtable Discussion on Mobilising Private Investment in Low-Carbon, Climate-Resilient Infrastructure, 25 September 2012, p Loy C. (2012), KfW Development Bank, Promoting Energy Efficiency in Buildings, 26 Guertler P. and Royston S. (2013), Financing energy efficiency in buildings: an international review of best practice and innovation, A report to ADEME and the World Energy Council, Association for the Conservation of Energy, London, p Power A. and Zulauf M. (2011), Cutting Carbon Costs: Learning from Germany s Energy Saving Program, What Works Collaborative, Building Knowledge & Sharing Solutions for Housing & Urban Policy, p Guertler P. and Royston S. (2013), Financing energy efficiency in buildings: an international review of best practice and innovation, A report to ADEME and the World Energy Council, Association for the Conservation of Energy, London, p ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

43 It is estimated that 240,000 new jobs have been created in the building industry 30 These numbers indicate that in addition to reducing fossil fuel dependence, the promotion of energy efficiency measures provides major economic benefits, by increasing employment and hence tax revenues. The investment in energy efficiency also helps in reaching climate protection targets, 31 and therefore to mitigate the adverse economic effects of climate change. 32 The KfW programs have also shown that the combination of professional advice and easy access to low interest loans can simplify a complex process and persuade more people to invest in energy efficiency improvements in their homes. The fact that these programs are supported by a single trusted agency has led to increased trust among householders. With a strong promotion campaign, the KfW financing schemes can be further expanded, contributing to even more energy saving investments, which in turn can help businesses and create jobs. 3.3 Lessons learned The KfW programs have successfully contributed to increased energy efficiency in the German building sector. They have also motivated investors to take a step further from the energy efficiency standards set by the German law, and they have invested in research and development in relation to new innovative technologies in this sector. The most valuable lessons learned from the promotion of these energy efficiency programs can be summarized as follows: a. The programs address a wide range of potential investors as opposed to a limited group. Almost all domestic buildings are eligible for subsidies for retrofitting. This has enabled the broad acceptance of the program and the generation of scale effects in the energy efficiency sector. b. The strong link between existing legislation and financial incentives ultimately alter consumers energy consumption behavior. c. The establishment of the KfW-Efficiency House has become a performance standard that has set a recognizable brand for energy efficiency in buildings. In doing so, this technical standard has helped make it possible to compare energy efficiency performances of buildings, better communicating the environmental goals of German legislation. d. Financing retrofit programs through a publicly supported investment bank (KfW) provides the government with a funding investment tool that is immensely powerful across all regions of Germany. This gives weight to the program, increases efficiency and leverage, and inspires private sector confidence. KfW does not have to promote itself, and instead can rely on local banks to conduct business on its behalf Dimadama Z. (2011), Keynote Speaker at the Round Table Discussion on Climate Change and Renewable Energy Resources in the wider Black Sea area in the framework of the Hellenic-Azerbaijani Green Energy Forum co-organised by the ICBSS and the Center for Strategic Studies under the President of the Republic of Azerbaijan, Baku, 8 July Pfliegner K. and Gumb G. (2012), Climate and Energy Policy in Germany: Mechanisms to encourage Private Sector Investment / Participation in Low-Carbon Development, a Case-Study developed for the OECD Roundtable Discussion on Mobilising Private Investment in Low-Carbon, Climate-Resilient Infrastructure, 25 September Schroder M., Ekins P., Power A., Zulauf M., Lowe R. (2011), The KfW Experience in the Reduction of Energy Use in CO2 Emissions from Buildings: Operation, Impacts and Lessons for the UK, UCL Energy Institute, p. 57. VOLUME 15, JULY

44 3.4 Limitations Although the KfW programs are widely considered a success in terms of increasing energy efficiency in the housing sector, it is useful to outline the potential challenges entailed by particular aspects of this approach, which could raise obstacles for other countries. a) The complexity of the German legal framework means that there are many parameters to be considered, and so its incorporation by other countries would not be an easy task. b) Germany s highly decentralized system means that there is a wide range of financing opportunities, at the federal, regional and even local levels. Again, potential investors need a deeply understanding this complex environment in order to identify the best program for their own needs. c) Complexity and confusion can sometimes arise from networks of multiple experts (energy advisers, builders, engineers, architects and others) involved in a retrofitting procedure, offering different insights and interpretations. d) The German energy efficiency programs remain works-in-progress, acquiring new technical standards and needing new developments. For this reason, open channels of public advice and communication are crucial. DENA is the main agency responsible for summarizing, simplifying, and standardizing this process. 34 e) Refurbishment procedures and modernization of buildings for high energy efficiency outcomes are valid criteria for rent increases. However, German law forbids rents to increase more than 11% per year. This imposes substantial limitations on landlords who want to invest in energy efficiency retrofits. Tenants do often favor energy saving modernization and are willing to accept some increase in their rents, but want tighter regulation of rent increases GERMANY AND AZERBAIJAN: ENERGY EFFICIENCY COOPERATION OPPORTUNITIES Over the last two decades, the bilateral relationship between Azerbaijan and Germany has developed into a new strategic partnership. The number of visits and contacts between highlevel officials, diplomats and business communities indicates flourishing cooperation in many fields, among which energy emerges as vital. A characteristic example is the recent official visit by the Azerbaijani President to Germany on January , highlighting the strategic relations between Baku and Berlin. One of the items on the agenda was the Southern Gas Corridor, which will bring Azeri gas from the offshore 34 Schroder M., Ekins P., Power A., Zulauf M., Lowe R. (2011), The KfW Experience in the Reduction of Energy Use in CO2 Emissions from Buildings: Operation, Impacts and Lessons for the UK, UCL Energy Institute, p Schroder M., Ekins P., Power A., Zulauf M., Lowe R. (2011), The KfW Experience in the Reduction of Energy Use in CO2 Emissions from Buildings: Operation, Impacts and Lessons for the UK, UCL Energy Institute, p ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

45 Shah Deniz field to Europe, through the TANAP and TAP pipelines. This marks Azerbaijan as an increasingly important partner for Europe, and Germany in particular. According to the Federal Foreign Office, 36 Germany imported 2.2 billion Euros worth of oil from Azerbaijan in 2013, making Azerbaijan Germany s seventh most important supplier of crude oil. From the European point of view, the Eastern Partnership joint initiative between the EU Member States and the Eastern partner countries (Ukraine, Moldova, Georgia, Azerbaijan, Armenia and Belarus) promotes the objective of ensuring sustainable, secure and affordable energy. The development of energy efficiency and promotion of renewable energy sources are key steps in this direction. The EU s objectives and rules on energy efficiency and renewable energy sources provide a framework that can inspire policies in Eastern Partnership countries, Azerbaijan included. These countries need to develop a long-term strategy and build a stable policy framework for developing renewables. They also need to strengthen their capacities and increase investments to foster energy efficiency. 37 For Azerbaijan, the EU-funded Energy Reform Support Programme (ERSP) is aimed at assisting the country in reviewing its national energy strategy with the view to identifying new infrastructure needs, and specifying legislative and institutional reforms to promote energy efficiency, energy savings and a greater use of renewable energy sources. Azerbaijan owes its rapid economic growth to its large reserves of oil and gas; however, this has led to substantial dependence on these industries. The improvement of the country s energy intensity and energy efficiency are essential to achieving more sustainable energy consumption. The potential for energy saving in Azerbaijan is approximately 30% across different sectors, such as industry and the building sector, where out-of-date equipment and materials lead to significant power losses. The benefits of an energy-efficient economy have been recognized in Azerbaijan. To this end, Germany is already supporting the country by offering knowledge, experience and technological advancements in the field of energy efficiency. In this framework, cooperation between KfW Bank and Azerbaijan targets a variety of issues. The improvement of energy efficiency and the promotion of renewable energy sources are among the top priorities. The KfW contributed to the stabilization of the power supply of the country after independence, and financed the construction of a 150 km transmission line from Azdrez to Imischli. Today, the bank works closely with the Azeri government on projects in the renewable energy sector. 38 Another example of the German-Azeri cooperation is the collaboration of the Green Growth Fund Southeastern Europe (GGF) and the Azerbaijan-based MuganBank, demonstrating the importance of financing initiatives for energy efficiency improvements. In 2014, the two organizations announced the launch of a $5 million loan that would enable MuganBank to issue Aliyeva G., Gusev A., Aboltins R., Chubyk A., Krug M. (2013), Workshop Eastern Partnership Prospects on Energy Efficiency and Renewable Energy, DG for External Policies of the Union, EXPO-AFET_AT(2013)433708_EN.pdf VOLUME 15, JULY

46 loans to promote energy efficient investments in Azerbaijan. Through this agreement the GGF facility committed to support the Azeri bank in expanding its lending operations to sustainable energy financing for micro, small and medium enterprises and retail clients. The typical energy efficiency measures that would be financed included improvements to the building envelope, heating system upgrades and energy efficient equipment installations. Particular emphasis is given to rural areas, where there is potential for investments in greenhouse renovation and replacement of agricultural equipment. According to GGF estimations, the total investments in energy efficiency will lead to emissions reductions of 4200 tons of CO 2 per annum, and primary energy savings of 8700 MWh. 39 Germany focuses on training experts and decision makers on energy efficiency issues. For Azerbaijan, training programs and seminars initiated by Germany, aim to consolidate and expand the knowledge of representatives from relevant institutions and government authorities about energy efficiency technologies. Through these training programs, experts gain a deep understanding of the need for energy saving and the link with the objectives of the national energy policy. In this respect, in 2013 Germany s Renewables Academy (RENAC) launched a training program under the title Training in Energy Efficiency (TrEff) addressing Azerbaijani political and business decision-makers. 40 This international program ran under the banner Energy Efficiency - made in Germany and was sponsored by the German Federal Ministry of Economics and Technology (BMWi) as part of its Energy Efficiency Export Initiative. 41 Three separate series of seminars were organized in Baku and Berlin in 2013 focusing on energy efficiency issues. They all had a common perspective, namely how the local economy can be boosted by the development of energy efficiency technologies, and similarly how to enhance the international competitiveness of local enterprises. 42 Overall, Azerbaijan could benefit greatly from the German experience in increasing energy efficiency. There are four main strands of activity that Azeri efforts should concentrate on: a. Legal framework: thorough analysis of the European and German legislative frameworks on energy efficiency and critical assessment of specific rules that could be incorporated into Azeri laws. b. Financial incentives: offering financial assistance and incentives to potential investors is vital for practical success. c. Technical assistance: equally important is the training and capacity building of policy makers and representatives of the energy sector, in order to familiarize Azeri experts with the relevant legal framework, available technologies, best practices and pilot projects that can be adapted to the local conditions. d. Raising awareness: changing people s energy consumption behaviors through efficient ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

47 communication tools and different kinds of measures that have been tested in practice. Last but not least, Azerbaijan should also take into consideration German practices of promoting energy democracy for a comprehensive energy transition to increased efficiency and use of renewables. Germany s approach is based on coalitions of experts (from either the public or private sector) and civil society (scientific organizations, unions, professional groups, citizens, and others), who join their forces to address the challenges of the energy sector. In this respect, decisions are taken with the active participation of multiple stakeholders with bottomup, decentralized practices. 43 In addition, effective energy reform processes bring together different, and often conflicting, interests. This is why the legitimacy and empowerment of various actors is a prerequisite for a better energy future. 43 Dimadama Z. (2014), Good Governance for a Better Energy Future: The Case of Azerbaijan, CCEE Policy Brief, No. 10. VOLUME 15, JULY

48 CHAPTER 3 Energy Efficiency Policy in Israel An Overview with Recommendations for Future Collaboration with Azerbaijan Z ev GROSS 1. INTRODUCTION Israel has always been an energy island, which until recently had to import all its primary sources of energy. Its reserve capacity at peak hours was approximately 3% - a far cry from the reserves generally associated with countries at Israel s levels of development. The first years of the 21 st century were characterized by a constant fear of grid failure due to insufficient capacity. This led to continuous efforts to improve energy efficiency and the first efforts to utilize renewable energy for thermal use (domestic hot water), which currently stands at about 3,000 MWt. Approximately ten years ago, natural gas reserves were discovered off Israel s coast and commercially developed for the local market. Recent discoveries of relatively large reserves of natural gas, potential petroleum reserves and actions to exploit local shale reserves offer increased energy independence. In addition, recent actions to incorporate renewable energy resources have led to development of capacity in those areas. While all these recent developments have affected Israel s access to energy resources, they have not in any way impacted on Israel s situation as an energy island. Energy security and the ability to deliver energy in a qualitative and cost accessible manner are not only a function of access to primary energy resources, but also a function of capacity deliver energy to it consumers, which depends on a broad range of variables. Israel has, in fact, expanded its generation capacity to approximately 15,000 MW - over 13,500 MW held by Israel Electric Corporation (IEC) (as of December ), approximately 1,200 MW fossil fuel (natural gas) held by Independent Power Producers, and the remainder, renewable energy (mostly solar PV), for electricity. In addition to issues connected to primary energy availability and energy delivery capacity, environmental issues also play a role in the energy market. Utilization of fossil fuels of any kind impacts the environment to a certain extent. Israel, as a member of the OECD and a country committed to sustainable development, wants to assure sustainable delivery of energy to consumers and sustainable consumption of energy by those consumers. 48 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

49 FIGURE 1: Israel s Fuel Mix for Electricity Generation Percentage of Fuel Mix Electricity Generation Fuel Coal Heavy Oil Natural Gas Methanol 0.01 Diesel Fuel Total Source: IEC financial statements Q This assessment will concentrate on electrical energy, as opposed to fuels. It will review the various policies on energy efficiency, as well as the tools, activities and programs Israel has developed and implemented in order to achieve demand efficiency. We will also touch upon other elements of sustainable energy development in Israel, on both the demand and the supply sides. This will provide a more comprehensive overview of the Israeli experience, as well as giving a broader background to thoughts and recommendations for collaboration. 2. THE INSTITUTIONAL FRAMEWORK Energy Efficiency Energy Efficiency per se is in the jurisdiction of the Minister of National Infrastructure, Energy and Water, as determined by the Energy Sources Law The Ministry of National Infrastructures Energy and Water ( MoE ) regulates energy efficiency (i.e. defines the scope, nature and subject of energy efficiency), and is the prime actor in the area of energy efficiency activity at the national government level (as described below). Notwithstanding the changes described below, MoE remains the energy efficiency regulator as well as the exclusive actor in the area of Market Transformation activities (see below) regarding EE. MoE s exclusive mandate ended with the Clean Air Law This law, which aimed to mitigate pollution - included CO 2 emissions - was leveraged by the Minister of Environmental Protection to include energy efficiency in preconditions for emissions licenses issue to certain types of industrial energy consumers. Additionally, under Government Resolution no of (Creation of a National Plan for the Reduction of Greenhouse Gasses in Israel), exclusive jurisdiction for energy efficiency projects - and the related budgets - was taken from the Ministry of National Infrastructures (now MoE) and was divided among other ministries, based on sector. The Ministry of National VOLUME 15, JULY

50 Infrastructures was given jurisdiction over residential sector projects (and budgeted for the same). Jurisdiction for projects in all other sectors was shared among the Ministries of Industry Trade and Labor (now the Ministry of the Economy) and Environmental Protection. During the period (inclusive), these two ministries published tenders for grants for energy efficiency projects, especially in the industrial, commercial and municipal sectors. Results of the projects were translated into emissions reduction data and used in the reports filed by Israel under its emissions reduction commitments. In 2013, the budgets initially allocated under the said resolution were withdrawn, and presently, only the Ministry of National Infrastructures, Energy and Water is financing energy efficiency projects in all sectors through grants. In , the Ministry of Construction and Housing convened a group of stakeholders with the objective of creating standards involved in energy efficient building (standards which, to a certain extent, already been created by the Ministry of National Infrastructures - Israel Standard and the Ministry of Environmental Protection - Israel Standard 5281). To the best of our knowledge, this Ministry has taken no further steps in the area of energy efficiency. During the course of amending the Energy Resources Law (carried out in 2011), new consultation requirements were imposed on the Minister of National Infrastructures, Energy and Water. The Minister was now required to consult with the Minister of Environmental Protection with respect to all regulations, and with the Ministers of Defense and Inland Security, on regulations affecting military and police facilities. Recently, the electricity regulator (the Public Utilities Authority (Electricity) PUA ) has started to consider a broader role in the EE space. It had already approved certain tariff arrangements aimed at incentivizing energy efficiency (mostly load shedding, which could be looked at more as demand response). The PUA has taken no real further action so far in this area. Although certain municipalities have created departments focused on sustainability, environment, etc., no actual municipal-scale incentivization has been accorded to entities operating in the EE space. Certain NGOs championing EE have been developed, such as the Israel Energy Forum and the Organization of Renewable and Energy Efficiency Companies. Renewable Energy Renewable Energy is the purview of a number of stakeholders - the Minister of National Infrastructures, Energy and Water (policy development); the PUA (regulator licenses, tariffs); Israel Electric Corporation (the registrar ); the local regional licensing office (siting/ building permits); and NGOs (see above). 3. POLICIES Energy efficiency in Israel is driven by a number of underlying policies: Electricity is to be accessible 24/7 to all customers; Israel is to cut back on its consumption of electricity by 20% of the BAU scenario by ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

51 (to 64 TWh/annum instead of 80 TWh/annum under the BAU scenario - i.e. 16TWh/year as at 2020); FIGURE 2: Israel s Projected Energy Consumption (TWh/annum) (Blue Curve - BAU; Red Curve EE Target) Source: Ministry of Nat. Inf. Energy & Water Website Sustainability is driven by these policies: Israel is to generate 10% of its electricity from renewable resources by 2020; Israel is to incorporate natural gas into the energy mix up to approximately 70%; Israel is to cut back its CO 2 emissions by 20m tons per year. 4. POLICY IMPLEMENTATION ENERGY EFFICIENCY The implementation of energy efficiency policy is governed by a document known as the Energy Efficiency Plan , published by the MoE in The document was drawn up to put a practical face on the government resolution defining the Israeli Energy Efficiency target (Resolution 3261 of ) and the resolution setting forth the broad directions of government activity to attain the goal (Resolution 4095 of ). The document is not really a Plan, as it provides only a general description of activities to be carried out to attain the targets stated in the plan. The document does include a fairly comprehensive map of energy consumption in Israel as well as projections for potential savings. Although the map, in its published form, was never formally adopted by government, it was in its entirety incorporated into the national Emissions Reduction Program. This program VOLUME 15, JULY

52 was funded for two years, but the energy efficiency focus was removed, and the allocation of budgets and splitting of jurisdiction led to poor performance. This also contributed to the sacrificing of the program upon the first demands for budget adjustments. Another document that will have serious impact on the energy efficiency sector is the Energy Master Plan to be published by the Ministry of National Infrastructures, Energy and Water. This Master Plan has been under preparation for at least three years and is not yet available. It is hoped that it will become available during the course of this year. Energy efficiency is attained through two main spheres of activity: Market Transformation Activities and Resource Acquisition Activities. Market Transformation Activities are aimed at the population as a whole, rather than individual consumers. These activities include legislation, regulation, standards, labeling, awareness campaigns, formal education, and informal education. Resource Acquisition Activities target specific consumers or specific types of consumer. These activities are generally supported by various types of incentives regulatory incentives, tax incentives, financial incentives, awards, etc. 4.1 Market Transformation Activities Legislation In Israel, the energy efficiency sector is guided for the most part by one law: the Energy Resources Law 1989 (amended 2011). The law authorizes the Minister of National Infrastructures Energy and Water to promulgate regulations with regard to, inter alia, the efficient use of energy. The law is extremely broad and essentially gives the Minister almost unlimited leeway as to the nature of issues he may address. An amendment to the law in 2011 obligated the Minister to consult with the Ministers of Defense and Homeland Security, where regulations might impact facilities held by security forces. The amendment also required the Minister to consult with the Minister of Environmental Protection. The law establishes the function of the Commissioner, the government s chief energy efficiency official. This position has traditionally been held by the Head of the Energy Efficiency Division of the MoE. The law carries criminal penalties for violation of the regulations. The ramifications of these provisions are that all regulations must be approved by the Knesset (Parliament). This requirement, along with the requirement for consultation with other Ministries, can make the regulation promulgation process quite arduous. Regulations and Standards Although these two instruments are different, in Israel, almost all energy efficiency regulations 52 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

53 on energy performance are based on previously established standards. Standards generally deal with physical aspects of goods, in addition to safety requirements and testing protocols (especially for safety). Some standards include energy performance requirements or methodologies for determining energy performance of the equipment/item. For the most part, standards are voluntary, except for safety matters. In these situations, the Minister of Economy may grant the standard the validity of a regulation, and then compliance is mandatory. Recently, the International Standards Organization (ISO), and in its wake, the Israel Standards Institute, adopted an Energy Management Standard known as ISO (in Israel, Israel Standard 50001). The standard sets forth the methodology for monitoring and managing energy consumption at the organizational level; however, it clearly sees energy efficiency activities as a component of its methodology. There are areas in which energy factors are taken into account, but cannot be automatically translated into regulations as the promulgation of these regulations do not fall within the regulatory mandate of the Minister. The classic examples are the standards relevant to the energy performance of buildings. While the MoE has had significant influence on the development of these standards (notably: Israel Standards 5280 and 5282 as well as IS 5281), their translation into regulation is outside the scope of the MoE s jurisdiction. However, the MoE does its utmost to see that these standards are implemented (e.g. in the government resolution on energy efficiency in 2008, IS 5282, which deals with the energy efficiency of building envelopes, was adopted with regard to the design of new government buildings as well as rental properties for government offices). Regulations, as opposed to Standards, require mandatory compliance (see Appendix). In situations where energy performance and testing have been addressed in a standard, the regulations might determine minimum energy performance (Minimum Energy Performance Standards or MEPS ) as a precondition for import (e.g. air conditioners, refrigerators/ freezers, washing machines, clothes dryers, dishwashers), or as a precondition for use (electric motors), or as a minimum performance to be monitored through the equipment lifetime (hot water boilers, steam boilers, chillers, pumps). Minimum energy efficiency can also be expressed as maximum energy consumption for an item or matter (e.g. stand-by losses). A corollary instrument to MEPS is the Energy Rating system, whereby the MEPS is given the lowest rating and items meeting performance levels above the minimum are rated more highly. In Israel (as in other countries), ratings are by letter, with G representing the minimum and F - A, representing higher performance items. Each letter is assigned absolute performance values or a range of absolute values. As a rule, the ratings are in effect for a limited, predetermined period, after which the values attributed to each rating level are changed (in some jurisdictions, additional levels are added. In Europe there are A+++ levels. In Israel the G-A rating remains constant with a change in the values they represent.). Ratings of the nature described above are generally used for appliances (e.g. refrigerators, dishwashers, washing machines, air conditioners, electric cooking stoves). There are ratings that are also used for VOLUME 15, JULY

54 equipment (e.g. electric motors), as well as ratings determined for energy performance of buildings. However, to date these ratings have been only been incorporated into non-binding standards and have not yet been promulgated into regulation. Another regulatory instrument used in Israel especially with regard to appliances - is Labelling. Under this system, energy performance information is put onto a label which must be attached or placed upon the particular item (e.g. small residential heaters). Where there is also a rating system for that particular item, the rating is also a component of that information, with the ratings being color-coded for easier identification. In Israel, the color dark red connotes inefficiency and the lowest rating while dark green connotes the highest degree of efficiency and the highest rating (e.g. for refrigerators and air conditioners). Minimum energy efficiency - especially with regard to equipment - is monitored by regulated, Mandatory Inspections on a timely or use basis (inspections once every set time period or once every specified number of hours operated). Inspections of this nature are required for Boilers (hot water and steam), pumps above a certain capacity, chillers and the like. The minimum performance is stated in the regulation. Where the equipment is non-compliant, a retrofit must be performed and the equipment re-commissioned. Two more important regulatory instruments are the Energy Manager/Reporting regulation and the Energy Audit regulation. The first requires any consumer with annual energy consumption (irrespective of the fuel) of 300 toe/annum (toe ton oil equivalent) to (a) appoint an energy manager and (b) submit an annual report on consumption. The energy manager must be trained in accordance with the requirements of the MoE, and is expected to carry out a series of tasks proscribed by the regulations. The MoE has created a syllabus and has authorized certain qualifying training entities. The training is for cost and is financed either by the candidate (energy managers can now be freelancers) or by the candidate s employer. The Energy Audit regulation requires a consumer with a consumption scope of 2000 toe or more to perform an energy audit once every five (5) years and to update that audit once a year between full audits. The specifications of the audits have been published by the MoE and appear on its website. The audit program must be approved by the MoE in advance of the audit itself. These regulations have been criticized (a) because the 2000 toe level is relatively high; and (b) the regulations impose no requirement to act upon the results of the audit. An amendment to these regulations is now in the pipeline, with the consumption level reset to 700 toe, and mandatory action required pursuant to economically viable recommendations (as defined by the regulations). This amendment has already been debated by the Knesset, but was returned to the MoE with instructions to carry out further consultations. Awareness Campaigns The MoE has conducted a number of awareness campaigns since These campaigns included media advertisements (television, radio, newspaper), as well as incorporation of energy efficiency messages into a popular personal coaching television show. 54 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

55 Education Together with the Ministry of Education, the MoE has developed and incorporated energy efficiency syllabuses into the K-8 grade levels. As these are viewed as enrichment programs, they are not mandatory. However, as sustainability and energy security are becoming more pressing issues, such programs are becoming more mainstream. 4.2 Resource Acquisition Activities Regulatory Incentives These incentives generally grant either relief or exemptions from regulatory obligations, subject to certain time constraints and terms, or expedited licensing procedures where licenses are required. Incentives of this kind are not available in Israel for energy efficiency activities, although there are incentives of this kind for renewable energy (especially in the residential sector). Taxation Incentives There are many types of taxation incentives accorded to energy efficiency projects worldwide. Incentives include accelerated depreciation, preferential recognition of expenses or income, special taxation rates, rebates, special tax-oriented securities etc. In Israel, the taxation incentives are very limited - the only incentives available are accelerated depreciation and recognition of certain expenses on an immediate basis. It should be noted that under the Israeli Tax regimen, it is still not mandatory to submit personal tax returns, and this hinders adoption of many such tools, which are consequently non-viable. Grants/Awards In Israel, grants are used to consumers to perform energy efficiency projects among consumers. In 2004, the MoE launched the Support for Microprojects program, which offered grants for projects aimed at retrofitting facilities or equipment. This later evolved into sectorial incentivization programs (e.g. targeting hotels, industry); technology-oriented grant programs aimed at the general public or specific sectors (industry, municipalities); and mass appliance replacement efforts in the residential sector (refrigerators, air conditioners, residential water heaters). Certain projects had strong elements of performance contracting built in (notably, the Microprojects incentivization program supported performance contracting transactions after 2005 (see below); the Shared Savings Mechanism was adopted and approved in 2008 by government resolution for use in government facility retrofit projects; a recent incentives tender, aimed at the municipalities, was clearly a Guaranteed Savings mechanism). In 2010, responsibility for budgeted incentivization programs was split between the MoE (residential programs), while the Ministry of Economy together with the Ministry of Environmental Protection were given the mandate for Energy Efficiency incentivization programs within the framework of the National Program for the Reduction of Greenhouse Gas VOLUME 15, JULY

56 Emissions. While the projects were essentially energy efficiency projects, the methodologies of measurement were emissions-oriented rather than energy savings oriented. Fiscal Incentives This refers to other financial tools available to energy efficiency projects, beyond grants and awards. Examples include soft loans, loan and guarantee funds, dedicated energy efficiency funds and the like. The MoE embarked on an investigation of the potential instruments it could create, however these instruments were rejected either by the Ministry of Finance or by the MoE itself. Notwithstanding its previous refusals, the Ministry of Finance has commissioned a study on energy efficiency financing, which is to be presented soon. Promotion of ESCOs (Energy Services Companies) The Performance Contracting methodology and the ESCO concept were formally introduced in At that time, a public call was published, seeking expressions of interest from companies willing to operate under the Performance Contracting methodology, and who would come forward and register with the MoE. Those responding to the call to register were required to (a) sign a Covenant of Service which essentially aimed to ensure ethical business practices; and (b) provide proof that they were able to obtain at least NIS 1M in credit from reputable institutions. Later, the mere performance of an Energy Efficiency project under the Performance Contracting methodology was sufficient to prima facie qualify the project for incentivization under the Microprojects programs. Participants (ESCOs) which had not yet registered were allowed to register prior to the Tender Final Submission Date in order to benefit from this provision. Ideally, an economic environment - regulatory, taxation, fiscal environment - should have been created to address the needs of these companies and the relevant efficiency transaction structures. However, this has not yet transpired. Efforts are presently underway to engage the MoE in various elements of the incentivization efforts, and this issue will likely be addressed. 4.3 Financing of Energy Efficiency Activities In terms of energy efficiency financing, Israel has unfortunately remained extremely lowtech. Its conservative attitudes have left financing to the government budget, which is constantly faced with priority issues on the one hand, and procurement rule burdens, on the other. Performance contracting could potentially provide certain solutions, but there are structural challenges in relation to the Israeli Government procurement process. This is not to say that various financing forms were not reviewed and considered. In 2007, there were attempts to establish an energy efficiency fund, similar to those established in other countries. These funds grant soft loans to homeowners and commercial/industrial consumers. They fund guarantees to lenders;, rebates on energy efficient equipment, and grants. Potential 56 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

57 sources considered for these funds included surcharges on electricity consumption (similar to the systems benefit charge, or similarly named customer surcharges), and a charge imposed on the utility. Ultimately none of these were accepted. As stated above, tax incentives are another means of financing energy efficiency. The structure of Israel s tax system, however, leaves no room for such incentives, especially at the residential level. Additional methodologies of finance were market-oriented, i.e. rooted in the securities markets, much like the emissions trading mechanisms implemented during the early years of the Kyoto Protocol. Taking a cue from the carbon trading schemes and similar renewable energy trading schemes (Renewable Portfolio Standards), energy efficiency certificates were developed both in Europe and the US (although they were fundamentally different from one another). Additionally, combinations of market-oriented and taxation incentives were proposed (e.g. CEREBS ), however, they too were rejected. While it is true that a certain amount of market sophistication is necessary to implement these programs, they do have the potential for widespread acceptance (especially the American model, which was the most accessible). One type of financing scheme was developed relatively late and to an insufficient degree - the tariff oriented scheme. Decoupling was never introduced or considered in Israel. Under this system, the utility is assured return on its fixed costs and its investments in fixed cost items - such as energy efficiency retrofits but is not assured returns on variable costs. Since energy efficiency retrofits increase fixed costs and lower variable costs due to energy savings (actual energy then becomes a function of the utility s variable costs, which are reduced because less energy is needed), the utility becomes a willing partner to energy efficiency, as its profitability is not impaired. Some tariff-oriented schemes were tried, but these were very limited or incompatible with Israeli consumption culture. These schemes included special tariffs for electricity produced by consumers generators during peak hours (annual cap of hours available); attempts to have all consumers move to time-of-use tariffs; tariff-incentivized load shedding; tariff relief upon reduction in consumption as compared to previous consumption levels; and even a scheme aimed at aggregators to aggregate negawatts. No formal report on the results of these schemes was released, however they were not well advertised and therefore failed to achieve the uptake achieved by similar programs in other countries. One exception is the tariff for generation, which remains in place but is limited by a cap placed by the Ministry of Environmental Protection. There is a cap of 100 hours annually, though the program approved by the regulator called for up to 300 hours of generation annually per generator. 5. RESULTS OF ENERGY EFFICIENCY MEASURES Notwithstanding the MoE s emphasis on the Energy Efficiency Program (the Program), it appears that there is no published organized data set of resulting savings. In fact, VOLUME 15, JULY

58 accessing data regarding consumption in Israel is extremely challenging. Up to and including 2010, the Israel Electric Company (IEC) published an organized data set of relevant electrical market data. This ceased in 2011 and since then, there have been no such data sets published per se. Today, therefore, the most official source of data on a nation-wide scale are provided by the financial statements of the Israel Electric Corporation, which publishes these statements in accordance with the rules governing publically traded companies. On the basis of the 2010 statistical report and IEC s Annual Financial Statements for 2013, we have created the following chart of electricity consumption for the years (Figure 3). FIGURE 3: Comparative Generation vs. EAC Year Gross Generation Net Generation EAC M. KWh % Net M. KWh % Net MKWh % Net % Gross , , , , , , , , , , , , , , , Note: The table does not relate to electricity generated by others not purchased by IEC. We have not been able to locate data on that component. For the purposes of Figure 3: Total Generation: Total energy generated by IEC generation units; Net Generation: Total Generation less self-used energy (~4%); EAC: Energy Available for Consumption: Net Generation plus purchased energy (~0.65) less transmission and distribution losses (~4.2%). Figures in black against a white background are figures reported by IEC. Figures in red against a yellow background are calculated on the basis of the following assumptions (assumed on the basis of the 2010 statistical tables): (a) EAC is 96% of the Net Generation; (b) EAC is 92% of the Gross Generation: Inland consumption broken down by consumer sector is set forth in Fig. 4. The non-availability of this breakdown for 2011 makes it impossible to create a similar table per consumer sector for the five year reference. 58 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

59 FIGURE 4: Israel s Inland Electricity Consumption by Consumer Sector 2012/2013 Client Sector Consumption (% of Total) Consumption (GWh) Consumption (% of Total) Residential , ,662 Commercial/Public, , ,752 East Jerusalem 3.2 1, ,898 Palestinian Authority 4.7 2, ,779 Industry , ,372 Agriculture 3.2 1, ,935 Water pumps 5.6 3, ,108 Total , ,506 Source: IEC Annual Financial Statements as at Consumption (GWh) It should be noted that 2012 and 2013 were atypical years for energy consumption. EAV developed as follows: %; %; %; 2013 (6.3%); %. No explanation has been put forward for the anomalies, except for a mild summer in 2011, which is insufficient. Comparing the data with Figure 2 shows an apparent return to the behavior predicted under the Plan, however, the behavior is erratic and requires close monitoring. It should be noted that in its financial statement update for Q3 2014, the IEC amended its peak consumption growth predictions for from 3.8% annually to % Key Energy Efficiency Measures: Extension of Daylight Time: Daylight time was extended for an extra month, commencing October The estimated savings for the month of October 2013 alone were 46 million KWh. Replacement of Electric Residential Water Heaters with Solar Water Heaters: The project addressed a kibbutz, where 220 electric residential water heaters were replaced with MoE support. The change is projected to save 400,000 KWh/annum. Energy Efficiency Projects in Institutes of Higher Education: Measures addressed lighting, air conditioning, and ice storage systems as well as installation of new control systems. The projects are expected to save 3 million KWh/annum. Replacement of Old Chillers (Building Cooling Systems): The MoE incentivized replacement of inefficient chillers with new technologies. About 75 entities benefitted from this intervention. The projected savings are about 48 million KWh/annum. Energy Efficiency Projects in Municipalities: The MoE awarded grants to municipalities seeking to perform EE projects incorporating certain technologies. 170 municipalities applied and 44 were awarded grants. Although it is not stated specifically, analysis of the transaction VOLUME 15, JULY

60 terms shows the transaction to be of the Guaranteed Savings Performance Contracting model. The projected savings are 17 million KWh/annum. 6. ADDITIONAL INSTRUMENTS FOR SUSTAINABILITY Although energy efficiency contributes to the sustainability of the energy sector in Israel as elsewhere, the drivers for energy efficiency are not necessarily sustainability. The truth of the matter is that until , there was a serious lack of installed capacity, which posed a major obstacle to energy security. While clearly equating energy efficiency with sustainability, Israel sought to make its energy sector more sustainable through two additional major efforts - the large-scale introduction of natural gas into the energy sector and the incentivization of renewable energy. Natural Gas The large-scale introduction of natural gas into the energy sector was the result of discovery of large off-shore natural gas deposits in the Mediterranean. The first well supplying Israel was the Yam Tethys well, off of the city of Ashkelon, with an initial capacity of about 30 BCM. Supply commenced in 2004 and continued into The well has now been depleted and is being used as a storage facility for natural gas being produced in the north (Tamar well). The next supplier of natural gas to Israel was EMG, a joint venture between an Israeli and Egyptian firm, supplying natural gas from deposits off of Egypt. Supply commenced in 2008, due to terrorist activities against the pipeline, supply ceased in 2011 (note: supply to Jordan was also ceased as a result of this activity). The next well discovered was the Tamar well, discovered off the coast of Haifa. This deposit has a capacity of 283 BCM and has already begun supplying gas to customers. It is projected that this deposit will be able to supply between 8-11 BCM/annum. The next large deposit discovered was Leviathan, discovered in Israeli economic waters between Israel and Cyprus. The deposit has a capacity of 535 BCM and its production capabilities are under development. There is another 50 BCM of estimated capacity in deposits off the coast of Israel, some under exploration. Some are prima facie not economically viable. There is an additional deposit of about 30 BCM north of El Arish, the rights to which belong to British Gas. There were initial thoughts of purchasing gas from there, but regional factors ultimately led Israel to decline. In addition, Israel decided to build a maritime gasification facility off the coast of Hadera, where imported LNG could be processed and supplied to shore. It is designed to supply 1-3 BCM/annum. 60 ENERGY EFFICIENCY: VIEW FROM AZERBAIJAN, GERMANY AND ISRAEL

61 FIGURE 5: Israel Projected Fuel Mix for Production of Electricity As Figure 5 shows, Israel is moving from a predominantly coal-based fuel mix to a predominantly natural gas based fuel mix. FIGURE 6: The Electricity Sector by Fuel Mix 2009/ RENEWABLE ENERGY Israel has used renewable energy on a regular basis since 1986, when the requirement for domestic solar water heaters was written into the building code. This was done in response to demand, freeing up the energy market from the domestic hot water demand. It was also a form of energy security. Today, the installed capacity for solar domestic hot water supply is VOLUME 15, JULY