Energy operations policy [EBRD

The document sets out the operational role of the Bank in this sector and establishes the overall framework for the Bank’s activities. This new Policy replaces and updates the Natural Resources Operations Policy and the Energy Operations Policy approved by the Board of Directors in 1999 and 2000, respectively, combining the two spheres of activity into one comprehensive policy.

Specifically, this Policy builds on past policies and complements more closely new regional and global energy initiatives now being implemented by national and international bodies. The Policy particularly mandates the Bank to increase its support for energy efficiency and renewable energy, corporate governance and transparency, and to refine its activities in other areas based on lessons learned and evolving best international practices.

The Policy encompasses all activities in energy conversion including: demand side performance, power generation, transmission, distribution and supply, the entire oil and gas cycle from production to transportation, refining, and distribution and coal mining. The Policy will guide the Bank in its direct investment operations and, as expressly provided, in its investments through financial intermediaries.

Summary

Midway into the second decade of transition in the EBRD region, it is clear that energy, more than any other single issue, holds the key to future economic development in the region’s countries. At the beginning of this period, in early 2006, oil and gas prices were far higher than forecast 3-5 years earlier. This has magnified the already enormous impact that energy has on economic, social and environmental sustainability in the region, well known for wasting energy through inefficient use. At the same time, its energy needs are projected to rise by 60-80 per cent over the next 20 years.

Of the Bank’s countries of operations, only four are rich in oil and gas; the others depend on oil and gas imports and nuclear, hydro and coal as their main, often problematic sources of energy. Higher world energy prices, likely to be sustained for some time, may offer great opportunity for growth in hydrocarbon-rich countries, although they must also grapple with questions of sustainable development and transparent revenue management. On the other hand, those prices also change the economics of various fuel mix options for energy consumers and offer greater incentive to increase security of supply. This can be achieved by diversifying sources of energy, reducing energy waste, increasing renewable energy, and co-operating with neighbours on cross-border energy issues.

Regardless of whether they are rich or poor in fossil fuels, one stark truth about energy use applies to all transition countries: highly-inefficient and heavily-polluting uses of energy threaten energy security and economic development and contribute disproportionate levels of the greenhouse gases linked to global warming. EBRD countries of operations use up to seven times the amount of energy it takes to produce each unit of GDP, relative to western Europe. Transition countries also emit more greenhouse gas per unit of GDP consumed than do western Europeans – 30 times more in some cases.

Businesses and governments in the region are starting to see that highly inefficient use of energy undermines their competitiveness in global markets. Decades of energy subsidies are slowly being phased out across the region: increasingly, this will have the positive impact of increasing energy efficiency by making it a bottom-line issue for businesses. However, it also puts the squeeze on some low-income households that find it hard to pay higher energy bills. A renewed effort is therefore required to protect the economically vulnerable.

For these reasons the EBRD is making energy efficiency the cornerstone of its 2006 Energy Operations Policy. Energy efficiency is fundamental to increasing energy security, reducing energy investment needs, addressing environmental concerns, alleviating affordability constraints and promoting the region’s economic competitiveness.

The Bank’s countries of operations are not insulated from global energy developments and in fact could play a pivotal role in shaping the energy markets of the future. In particular, the region faces the following medium-term challenges:

Competitiveness and efficiency: One of the most intractable challenges of transition has been the need to tackle the command economy’s legacy of energy-intensive production and poor-quality infrastructure, including in housing, government buildings, and power and heat generation, transmission and distribution. As energy prices are gradually increased to market levels, the competitiveness of firms in the region will suffer unless they succeed in increasing energy efficiency. An increased emphasis on energy efficiency is also part of the transition process, which requires further restructuring at the company, industry and economy level.
Investment and growth: As their economies continue to grow, the Bank’s countries of operations face huge energy investment needs over the medium term, even if energy efficiency can be improved. To support their growth, transition countries will have to compete on the international financial market to raise the money needed for these investments.
Energy security: The transition region is rich in energy but resources are concentrated in a few countries. The energy importers of the region can reduce energy dependence by cutting energy waste and expanding sources of supply. Reviewing the fuel mix and diversifying supply channels (through energy trade, market liberalisation and supply chain investments) are therefore important challenges.
Climate change: From a global context, many of the most attractive options to reduce greenhouse gas emissions are to be found in the Bank’s region, given its continuing high levels of energy wastage. The EBRD’s countries of operations are therefore expected to play a prominent role in the international effort to combat climate change, both over the medium term – where the region is crucial to achieve the Kyoto targets – and in the longer term.
Natural resource development: The region also has abundant energy resources: four countries are rich in oil and gas, while others have coal and renewable energy. If these resources are developed competitively, they can help to alleviate global supply constraints and contribute to an increased security of supply. Managed well, they can also be a boon to the region’s economies. However, the concentration of oil and gas reserves in only a few countries is raising concerns about energy dependence among energy-importing countries and, where there is poor governance, is increasing the scope for corruption in the resource-rich countries themselves.

The goal of the policy is to address these challenges and help the region to achieve secure, affordable and efficient energy supplies, which are fundamental to the emergence of open market-based economies and sustainable development. To meet this objective, the Bank is setting the following priorities:

Promoting energy efficiency: To underline the importance of energy efficiency, the Bank will adopt a formal energy efficiency and renewable energy target. The target is to lend or invest a minimum of €1 billion in energy efficiency and renewable energy projects during the period 2006 to 2010. This figure compares to a total of €674 million achieved during the 5 year period 2001 to 2005 (see Annex 6 for details). This target may be complemented when practicable (when data acquisition is reliable) by a target based on physical energy saved and/or emissions reduced.

The Bank is also launching a Sustainable Energy Initiative, which will have an objective to invest up to €1.5 billion in investments in greenhouse gas emission reduction projects in both the demand and supply sides, as well as outside, of the energy sector. While not a formal target, it is wider in scope.
Advancing the unfinished reform agenda: Despite substantial progress, large transition challenges remain in the transformation of the region’s energy sectors into efficient energy markets. The EBRD will continue to promote the reform agenda of commercialisation, unbundling, regulatory reform and private sector participation. These reforms are essential to create reliable energy systems and ensure supply-side efficiency. They are also a precondition for attracting the financing required for future investments.
Promoting renewable energy technologies: Although renewable energy sources are not yet always cost-effective (with the exception of hydro generation, they have so far played a minor role in the fuel mix of the region), they are growing in strategic importance as countries try to reduce energy dependence and increase their security of supply. In the long-term a switch to carbon-free technologies is also needed to address the threat of climate change. Under the Sustainable Energy Initiative and in line with its new target for energy efficiency and renewables projects, the EBRD will step up its support for renewable energy.
Promoting carbon trading: Transition countries have the potential to become some of the largest suppliers of carbon credits in the emerging market for greenhouse gas emission reductions under the Kyoto Protocol. The prospect of selling carbon credits could also stimulate investments in energy efficiency and renewable energy. However, realising this potential requires the creation of new institutions, clear regulatory frameworks and a critical mass of investments to kick-start the market. The EBRD will promote the creation of carbon markets in the region through investments, carbon funds and institutional and technical assistance.
Unlocking the region’s energy potential: Exploiting the vast energy reserves of the transition region is important to meet the growing international demand for energy and in achieving economic development in resource-rich countries. The EBRD will support transition countries in exploiting their energy resources and transporting them to market, thereby improving security of supply. In doing so, the Bank will promote competition, private sector participation and sound business practices in support of a market-oriented business model for the region’s energy sector.
Supporting sound natural resource management: Natural resource projects need to be well managed to avoid the ‘resource curse’ that has befallen many other resource-rich countries. The EBRD will finance projects designed to yield a lasting benefit for the local population and adhere to best international transparency and revenue management standards. Going forward, the Bank will require project sponsors to publicly disclose their material project payments to the host government as a minimum revenue transparency condition. In countries where governments have signed up to the Extractive Industry Transparency Initiative (EITI), the Bank will continue to play an active role to support its implementation, requiring project sponsors to follow its applicable methodology principles and criteria.
Promoting energy trade and competition: Where technically feasible, competition in the production, transportation and distribution of energy – and between different fuels – can increase efficiency and reduce the market power of individual suppliers. Regional energy trade can similarly yield efficiency gains and help to diversify supply channels. The EBRD will promote regional cooperation, competition and energy trade in the electric power, gas and oil markets.
Increasing nuclear safety: Transition countries are unique among emerging markets in having sizeable nuclear generation capacities. Climate change has led to a renewed interest in nuclear energy. However, for transition countries the main challenge in the nuclear sector remains safety. The EBRD will continue to manage nuclear safety grant funds as requested by the donors. The Bank will continue with its existing policy for the financing of nuclear facilities, with a modification: while the Bank will not consider providing financing to new reactors, it may provide financing to an operating facility in relation to nuclear safety improvements, or for the safe and secure management of radioactive waste and spent nuclear fuel, as well as for decommissioning, without a direct link to the closure of high risk reactors. The modification in approach allows the Bank to address the continuing pressing concern with safety at the numerous nuclear facilities that will continue to operate in the Region and to further strengthen the nuclear regulatory frameworks.
Promoting environmentally sustainable development: EBRD will require that projects are structured so at to meet its Environmental Policy. However, while Bank-financed projects will continue to be processed in, and monitored for, compliance with the Bank’s Environmental Policy, the Bank will seek out opportunities to improve environmental conditions, for example, financing environmental upgrades in power generation and reducing gas leaks.

The policy document explains and sets out these priorities in more detail, as well as describing how they will inform some of the Bank’s broader activities (such as policy dialogue with governments). This document will guide the Bank in its direct investment operations in the energy sector and, as expressly provided, in its investments through financial intermediaries.