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markets for ESCO services in other countries. Some funds could be used to promote use of ESCOs in these sectors, publicize the results of demonstration projects, and if necessary reform government procurement rules to enable performance contracting and use of ESCOs by the federal, state, and local governments. The public sector often lacks the capital to make energy-efficiency investments on its own, and thus is an excellent market for ESCOs if third-party financing is available. The response to this review defended the project’s main focus on small and medium-size enterprises as a lower-risk area for ESCOs. But from a policy perspective, what is important is finding where market failures are greatest and addressing them in a sustainable way. The potential for energy savings (and thus lower GHG emissions) in the public sector is great in most countries. Governments have The potential for energy more control over their own energy savings in the public use than they do over energy use in sector is great in most the broader economy, and governcountries, but there are ments are often among the largest significant challenges to energy consumers in a country, given realizing that potential. the scope of their activities. Still, the public sector presents unique challenges. For example, public entities may not have the power to reallocate their budget to energyefficiency investments, so financing is essential. ESCOs can often play a positive role in this area. Public entities may not be allowed to use future energy savings: their budgets may be reduced to cover only actual energy costs, which reduces incentives (and creates challenges for repayment). Procurement rules may force government agencies to award contracts to the lowest bidder, without considering life-cycle costs. Many developing countries have begun to address these issues. For example, China has developed an energy-efficiency procurement program, with a list of qualifying energy-efficient products that receive preferential treatment in procurements. Russia and Ukraine have both 74
adopted programs to help finance energyefficiency improvements in state-owned facilities, based largely on the U.S. Federal Energy Management Program. India is trying to promote energy efficiency in new government buildings by ensuring that these buildings meet or exceed the new voluntary energy code for commercial buildings. The plan is to use this effort to spearhead nationwide implementation of the new code (APP 2007; PNNL/ARENA-ECO 2003). This growing interest among developing countries creates an excellent opportunity for the Bank to engage constructively in this area.
District Heating District heating has also been an important area of engagement for the World Bank, with total commitments of $1.8 billion. Much of this investment has gone to supply-side efficiency: the replacement of inefficient, polluting boilers. The Bank began working on district heating in the early 1990s, after the fall of the Berlin Wall created new opportunities for engagement in the former Eastern Bloc. District heating is a very important form of energy in Eastern Europe and the former Soviet Union. It provides up to 70 percent of residential space heating, with the more northern countries typically seeing the largest shares of heat from district heating. The Soviet-designed systems were inefficient compared with the district heating systems in the West. They did not have adequate controls and were often oversized. They also relied less on combined heat and power production, which is typically very efficient, than was rational given the concentration of heating demand that the systems created. The Bank has undertaken 41 district heating projects since 1991. Some of the projects involved policy elements, either at the local or national level. For example, the Bank encouraged tariff increases and reform and restructuring of systems to make them more commercially oriented. In some cases, as in Poland and Romania, policy engagement encouraged governments to take a broad look at integrating district heating in the overall energy policy and strategy. These were all positive steps.