Energy Efficiency Retrofits Acceleration Project in Armenia: A Risk Management Plan

Overview of the Energy Efficiency Retrofits Acceleration Project in Armenia

Greenhouse gas (GHG) emissions from the building sector have more than doubled since 1970 and now represent 19% of all global GHG emissions. The lower middle-income countries in Eastern Europe and Central Asia (EECA), including Armenia, account for almost 40% of all non-OECD GHG emissions in the buildings sector. These countries also exhibit some of the world’s highest levels of per capita energy use in buildings, as well as potential for further growth, which make them good candidates for a GCF-supported energy efficiency retrofits acceleration project.

Globally, the building sector offers the greatest potential for abatement. Increasing the efficiency of energy use in buildings has estimated mitigation potential of 3.3 to 4 GtCO2e/year. Cost-effective best practices and technologies, such as deep energy efficient retrofits, can achieve 50-70% energy savings when they are broadly applied.

The buildings sector is one of major energy consumers in Armenia. Most buildings in Armenia were constructed during the Soviet era (35-60 years ago) when energy performance parameters were mainly overlooked. According to Armenia’s 2010 National GHG Inventory in the National Communication to the UNFCCC, almost 28% of primary energy resources are consumed in buildings, mostly in the residential sector, and 20% of GHG emissions.

Due to Armenia’s markedly continental climate with a long heating season and winter average temperatures around -5°C and an absolute minimum temperature of -42°C, energy consumption and GHG emissions in the Armenian building sector are mainly associated with space heating.

Average thermal energy consumption for space heating in new residential buildings in Armenia is 185 kWh/m2 per year with older buildings having significantly higher needs. One sub-set of buildings with significant energy-savings potential in Armenia is concrete panel buildings, of which there are about 4,300. In such buildings alone, the energy-saving potential from thermal modernization is over 1.25 TWh/year, with a GHG reduction potential of 250,000 tCO2 per year, and annual savings of US$ 63 million (based on the gas and electricity tariffs of 2014).

Energy costs constitute a large share of annual expenses incurred by public buildings. In a survey of educational, municipal and healthcare buildings, 35% of those surveyed stated that electricity bills amount to 11-20% of their total annual spending. Electricity costs were particularly high for educational buildings, where 27% of respondents reported the share of electricity costs to be above 20%. Many schools close in winter because they cannot provide adequate space heating. When they do operate, they often maintain indoor air temperatures significantly below adequate levels.

Risks Associated with the Project

The World Bank classifies Armenia as a lower middle-income country. In 2013, Gross National Income per capita was US$ 3,800. The adverse impacts of the financial crisis, which hit the Armenian economy hard between 2008-2011, were a key factor in the marked increase in the level of poverty in the country, reaching 14.1% in 2009. Poverty in 2011 became deeper and more severe as extreme poverty incidence increased compared to 2008, growing by 2.3 times (or by 2.1 percentage points); for the very poor, it increased by 1.6 times (or by 7.3 percentage points). In 2015, those living below the nationally defined poverty rate (monthly income per person less than US$ 92) was 32.2%. The Human Development Index is 0.729 (87th in global rankings).

Fuel poverty is prevalent in Armenia, affecting nearly 30% of Armenian households. The poorest quintiles of the population allocate a relatively higher share of their budgets to electricity. In general, rural fuel poverty (15-20% of rural households) is lower than in urban areas (30-35%) given the higher use of free / low-cost wood for heating. Rising fuel costs and the need for investments in new energy assets and rehabilitation of existing assets will increase the cost of providing electricity. Thus, households currently facing fuel poverty are likely to continue to experience significant pressures on their budgets as energy tariffs continue to rise.

A decision on 17 June 2015 by the Public Services Regulatory Commission to raise electricity prices by 17-22% led to protests in Yerevan and other cities. The extensive unrest demonstrates the significance of fuel poverty and has raised the issue to the top of the Government’s agenda.

The Government of Armenia in conjunction with the United Nations Development Programme has embarked on a project to scale-up investment in energy efficiency building retrofits in Armenia and reduce the overall investment risk profile of energy efficiency building retrofits to encourage private sector investment and reduce fuel poverty. The project is designed to address market barriers to energy efficient building renovation via a combination of policy and financial de-risking instruments and targeted financial incentives to key market players, such as building owners and energy service companies (ESCOs). By targeting policy, financial, market and technical/capacity barriers, the project will significantly scale-up investment in energy efficiency building retrofits in Armenia and reduce the overall investment risk profile of energy efficiency building retrofits to encourage private sector investment.

The UNDP has awarded your company, Climate Sustainability Services (CSS) a contract to execute this project on their behalf. CSS is a medium sized company with about 100 professional staff, 50 administrative staff and about 30 support personnel. Consequently, you were assigned as the project manager of a team that has been assembled and assigned to work on this project. You have gotten to the stage in your project planning where you are dealing with risks.

Your first assignment as a project team is to develop a Risk Management Plan that will guide the management of risk on this project.