Transaction costs of energy efficiency programmes in the Czech Republic

1. Transaction costs of energy efficiency programmes in the Czech Republic Michaela Valentová Jaroslav Knápek Czech Technical University in Prague IAEE 2011 Stockholm 20th June 2011

2. Rationale • When evaluating energy efficiency (or GHG emission reduction) programmes the analysis usually only compares the level of subsidy and the resulting effects (CO2 savings, energy savings, etc.). • In line with transaction costs theory, such evaluation leads to suboptimal decisions • Besides the level of subsidy (as the major cost of the programmes) evaluation of public programme needs to include transaction costs of the programmes, too.

3. Content • Transaction costs - theory • Transaction costs of energy efficiency programmes • Operational Programme Environment • Overview • Transaction costs of applicant/recipient • Transaction costs of administration system

4. Transaction costs theory What are transaction costs? • Not a single and generally valid definition • All actors in economy make their decisions under bounded rationality • Transaction costs can be compared to friction in physics • Some (two) of the definitions: • the costs of running the economic system • transaction costs are all costs connected with the implementation of a contract, excluding production costs Arrow, K. J. (1969) Pavel, J. (2005)

5. Transaction costs of energy efficiency programmes • Arise on the side of the administration body and on the side of the recipient (applicant) • Unsuccessful applications should be included, too (if evaluating the programmes as a whole) • the transaction costs amount to 10 – 40 % of the project or investment

6. EU Structural FundsOperational Programme Environment • Second largest OP in CZ • In 2007 – 2013 4.92 billion EUR available • 18 % of all OP in CZ • Additional 870 million EUR from national resources • Priority axis 3 –Sustainable use of energy • Energy savings and RES • ca 800 million EUR (14 % of total OPE Funds)

7. OPE – Priority Axis 3 • Over 1800 projects • Type of projects: • Schools, administrative buildings, hospitals • Type of applicants • Public organizations or private companies owned by public sector • Average subsidy per project • 7 mil CZK (280 000 EUR)

8. Application process Start Formal acceptance of the application for further evaluation Source: State Environmental Fund

9. Transaction costs – Applicant I. • Quite complex process • rate of successful applications in Priority axis 3 is the second lowest in OPE – 53 % • the application and implementation cannot be done without external consultant • Applications • Documents needed (always electronically and in two paper copies) • Initial project documentation, energy audit and the energy label for buildings, Official standpoint of the regional administration, building approval,… • Implementation • Organization of tenders, request for payment • M&V • Monitoring reports, final reports

10. Transaction costs – Applicant II. • 40 representative projects selected • Follows structure of the whole population as to type of organizations and other characteristics • However, the sample has higher average subsidy (project value) • Transaction costs origin • Externally purchased services connected with project administration • Bought from external companies • Transaction costs related to costs stated in the project budget • Internal project managers • Estimated to 1 – 1,25 full time employees according to other OP experience • Approximated by average cost of labour in the Czech Republic

11. Transaction costs – Applicant III. • In total, transaction costs in the case study represent 11 %of subsidy • In the studied sample, 4 % of subsidy for external services, additionally ca 7 % for internal employees • The number is likely to be underestimated because: • The costs of external services are likely to be underestimated in order to fit the project requirements • The calculations do not include the TCs/price of other parties (suppliers,..) • Does not include M&V transaction costs

12. Transaction costs - administration • Administrative costs of OPE are covered by Priority Axis Technical Assistance • Representing 2,91 % of OPE allocation • Furthermore, there are the Audit Body and PCA • Add another 0.2 percentage points • In total, administrative system of OPE costs more than 3 % of the OPE allocation • System boundary set at the level of programme • need to include negotiations, too

13. Conclusions • In total, for 13 billion CZK (520 million EUR) of subsidy allocated so far. • That means additional 1.8 billion CZK (72 million EUR) of transaction costsand 2.4 billion CZK (96 million EUR) when including unsuccessful applicants • The costs may be underestimated due to • External services being underestimated • Due to system boundary as it is set • Energy saving projects evaluated in the study • The burden is higher on the side of the recipients • TCs burden of smaller projects higher, but not significantly • How to reduce the overall complexity of the administration processes (and amount of paper work) while keeping the effects of the programme

14. Thank you for your attention. michaela.valentova@fel.cvut.cz Source: alphachart.blogspot.com