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2013, ÖKO Ltd., Corvinus University of Budapest

2013, ÖKO Ltd., Corvinus University of Budapest. Impacts of subsidy intensity on the efficiency and profitability of EEOP energy projects Evaluation of certain conditions of EEOP implementation. Structure of the presentation.

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2013, ÖKO Ltd., Corvinus University of Budapest

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  1. 2013, ÖKO Ltd., Corvinus University of Budapest Impacts of subsidy intensity on the efficiency and profitability of EEOP energy projectsEvaluation of certain conditions of EEOP implementation

  2. Structure of the presentation • Efficiency: Impacts of subsidy intensity on relative cost indicators, based on EMIR data of 1427 applications (hypothesis: the higher the subsidy intensity the lower the efficiency is); (analysis is based on calculating averages, correlation and crosstab analysis). • Profitability: Internal Rate of Return (IRR) analysis based on detailed financial data of 102 projects • Conclusions and recommendations

  3. EEOP renewable energy projects (4. priority) • 4.1. Heat or electricity generation based on renewable energy sources • 4.2. Satisfying local heating or cooling demand based on renewable energy sources • 4.4. Renewable based electricity generation, co-generation of heat and electricity, utilization of bio- methane • 4.7. Support for preparation and project development activities regarding geothermal heat and electricity generation projects • 4.9. Combined building energy development based on renewable energy utilization • 7.4. Rationalization of energy use in health care facilities

  4. EEOP energy efficiency projects(5. priority) • 5.1. Increasing energy efficiency • 5.2. Third-party financing • 5.3. A. Building energy development and modernization of street lighting systems5.3. B. Increasing energy efficiency combined with the utilization of renewable energy5.4. Energy modernization of the district heating sector

  5. Variables used for analyzing renewable energy and energy efficiency projects • Categorizing variables: type of the application, type of the organization of the applicant, decision making procedure, geographical region of the project, total budget, subsidy intensity, own resources • Environmental savings : increase in renewable based electricity generation (GWh/year), utilization of renewable energy sources (GJ/year), decrease in GHG emissions (t/year), energy saving due to increased energy efficiency (GJ/year), • Unit cost indices: investment need for 1 kW heat generation capacity (1000Ft/kW), investment need for 1 kW electricity generation capacity (1000Ft/kW), unit cost of 1 m2 solar collector (1000Ft/m2), unit cost of 1t GHG emission decrease (1000Ft/t), unit cost of 1 GJ annual energy saving (1000Ft/GJ/year).

  6. Average subsidy intensity based on project type, % (N=1427)

  7. 61,09 Total 82,78 Municipalities 63,93 Non - profit organizations 75,95 Public organizations 48,10 Businesses 0,00 20,00 40,00 60,00 80,00 100,00 Subsidy intensity according to organization type of the applicants (%)

  8. Results of efficiency analysis • Renewable energy projects based on organization type: local municipalities achieved the worst performance in energy savings per unit (with the highest costs for 1t GHG emission mitigation in this group). • Energy efficiency projects based on organization type: local municipalities achieved the worst performance in the unit cost of 1t GHG emission mitigation and unit cost of 1 GJ annual energy saving. • There was no significant difference in efficiency regarding the further variables (type of the application, type of the organization of the applicant, decision making procedure, geographical region of the project).

  9. Concluding remarks regarding the role of subsidy intensity on efficacy Subsidy intensity does not influence the efficacy of project investments (regarding per unit costs) in general. Only the case of solar collectors suggests that higher subsidy intensity results in higher per unit costs.

  10. Evaluation of EEOP energy projects from a profitability aspect • Aim of subsidizing: increasing profitability of financially non returning, but environmentally beneficial projects – taken into account market-level profitability expectations • Analysis based on the Internal Rate of Return indicator (IRR) • Based on detailed financial data of 102 completed projects

  11. Distribution of IRR based on total costs (without subsidies) - Analyzing necessity of subsidized projects based on IRR values • Analyzing links between IRR values and subsidy intensity

  12. IRR based on total costs (without subsidies)

  13. Distribution of IRR with subsidies taken into account

  14. IRR with subsidies taken into account

  15. IRR based o total costs (without subsidies) according to the type of the investments Although energy efficiency projects deliver lower IRR than expected in the market, but already lower level of subsidizing may be sufficient to turn them profitable. Renewable energy projects, however, need to receive significant subsidies.

  16. IRR without subsidizing according to the type of investment Higher subsidy intensity available for renewable energy projects partly eliminates the profitability gap between renewable energy and energy efficiency projects. Average IRR (with subsidies) achieves 14% even in case of renewable energy projects that is considered reasonably good compared to market expectations.

  17. IRR based on total costs (without subsidies) according to the type of the applicant Potential reasons behind higher IRR regarding projects of the business sector: • more conscious financial planning, more thorough selection and analysis of project alternatives, • municipalities and other public bodies can achieve in many cases higher subsidy intensity, resulting in the acceptance of lower IRR values (without subsidies) when deciding about project alternatives.

  18. IRR with subsidies taken into account Corrected IRR values show that projects in the private sector are more profitable also with subsidies taken into account, but this difference is not significant statistically. Indeed, differences in subsidy levels equalize to some extent the differences between the profitability of private and public projects.

  19. Conclusions and recommendations based on the profitability analysis • IRR fails to achieve market expectations regarding both energy efficiency and renewable energy projects. However, energy efficiency projects need lower, but renewable energy projects require higher rates of subsidizing to be able to be realized. • The current subsidy system decreases differences between the IRR of energy efficiency and renewable energy projects, this is recommended to be maintained also in the future. (Similarly in case of municipalities/public organizations vs. businesses). • Further suggestions to increase efficiency: • minimal subsidizing (approx. 10%) even in case of certain returning projects (e.g. third party financing) • minimal requirements for IRR (0%, 2%, 4% etc.)

  20. Thank you for your attention! 2013 ÖKO Ltd. Corvinus University of Budapest

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