The Sustainable Heating Transition in Europe and Central Asia

[Charles Cormier]

Good afternoon, good evening everyone. It's great to see everyone. I just want to welcome you to the World Bank Live event on the sustainable heating transition, challenges and opportunities. My name is Charles Cormier. I'm the Regional Director for Infrastructure at the World Bank for Europe and Central Asia. And I'll be moderating this event today from Baku Azerbaijan where I happen to be today. I'm joined by the World Bank's Vice President for Europe and Central Asia, Antonella Bassani. And before handing the floor to Antonella, let me just say a few words. I wanted to say that the sustainable heating transition is absolutely crucial to the achievement of net-zero targets in Europe and Central Asia. To address the gap, this gap, the World Bank has undertaken an analysis of the state of the heating sector in the region. And today our lead energy specialist, Jas Singh, will present the report's key findings.

After the presentation, we'll have a panel discussion and then open up for questions and answers to the audience. And we've been getting great questions already, but please feel free to use the chat to forward further questions. We have a terrific panel today we are joined by Mr. Shukhrat Vafaev, who's the director General for the Agency of Strategic Reforms under the President of the Republic of Uzbekistan. We have Paweł Mirowski, who is the vice President of the Management Board, the National Fund for Environmental Protection and Water Management in Poland. We also have Matthieu Ballu, who is a policy officer of the director general for Renewable Energy Unit at the European Commission. And last but not least, we have Stéphanie Bouckaert, who is the head of Demand Sectors unit at the World Energy Outlook from the International Energy Agency. So very exciting to have this group of experts that can answer your questions in a live chat. They're top-notch energy specialists who worked on this report on sustainable heating, and they're part of the European Central Asia infrastructure team.

So please type your questions in live chat. With that, I'll pass the floor over to Antonella Bassani, the Vice President of European Central Asia for the World Bank, who will provide opening remarks. Antonella, the floor is yours.

[Antonella Bassani]

Thank you very much, Charles. And good morning from Washington, DC. Good afternoon and good evening to all those connecting from Europe, Central Asia, and beyond. And a warm welcome to everyone. And speaking of warmth, I am speaking to you today from an office in a warm, well-heated building in downtown Washington, but the same sadly cannot be said for hundreds of thousands of people in the region. And as we meet today, many families in Europe and Central Asia are fearing the start of the winter. They're concerned about whether they will be able to pay their energy bills, stay warm, have enough fuel supply to last them through the winter. And they're also worried that air pollution, which is a silent killer, claims over 300,000 lives in the region, every year. And unfortunately, heating system in the countries in the Europe and Central Asia region are not sustainable.

They're expensive, inefficient, polluting and inadequate for the needs of people and businesses. And therefore, this sector needs a complete transformation. And we arrive at this conclusion thanks to a comprehensive analysis of the sector in 23 countries in the region, which will be presented to you shortly. And this new report has laid bare the deep challenges of the heating sector in the region, but also presents a way forward, which is promising. We at the World Bank believe that this transformation is an imperative that requires both political will and our collective commitment. The region needs to adopt policies that are bold and government programs that are ambitious, with targeted subsidies for cleaner and more efficient heating technologies. And I am delighted that among our panelists today, we have one such inspiring example from the Clean Air Priority Program from Poland, which is a very ambitious, sustainable heating program in Europe.

And glad that we will hear about it. So while this transition may be costly, the benefit far outweighs the cost. And in fact, we estimate that the economic value of the transition in today's dollar is over $400 billion, which are very significant returns. But this transition is more than just about improving heating services. It is about reshaping the energy landscapes, and it offers prospects of avoiding emissions equivalent to 8.9 gigatons of carbon dioxide from building related space heating by 2050. Yet the transition required a massive shift and a profound transformation in institution, systems, fuels, and technologies. It requires enabling policies, increased financing, and better business models and communications. It requires a heavy lift from countries, the development partners, and the private sector.

But the good news is that we believe this is achievable. The report outlines a framework for governments to adopt, to structure their transition plans' effectiveness and focusing on energy efficiency, district heating improvements, and clean individual heating systems. So I very much hope that today discussion will provide an opportunity to identify issues and requirements for the implementation of such a framework and to learn from existing experiences. Thank you for your attention. I look forward to the insightful discussion today. Back to you, Charles.

[Charles Cormier]

Thank you. Thank you, Antonella. So that was the vice president of Europe and Central Asia. Let's say pass the floor to the lead author of this report. This report of course had many other authors, but Jas Singh, who's a lead energy specialist working previously in the region and knows the region quite a lot, was, let's say, instrumental to get this report done. So Jas, you have the floor.

[Jas Singh]

Great. Thank you so much Charles and Antonella, and thank you so much for joining us today. We have a really terrific program for you. So heating has indeed been one of the more difficult sectors to abate. We started this report back in late 2021 and completed the report earlier this year with the generous support from the Energy Sector Management Assistance program. The report is available on our website for download, and we're only going to do a quick snapshot from the report, but in the report you can find quite a few facts and figures and charts and graphs on the status of heating and on the potential transition. What I'd like to cover during the few minutes we have today is why the status quo for heating is not sustainable, what some of the opportunities for improvement and investment are, the costs and benefits of the transition, and then the World Bank's proposed framework for tackling this transition.

So as everybody in the region will know very well, Europe and Central Asia or ECA as we call it, is the coldest region in the world, temperatures can get bitterly cold in many parts of the region. And as a result of that, about 24% of the energy use in the region is for heating, which gets back to what Charles said, that if we want to decarbonize the energy sector, we can't really do that without tackling the heating sector. One of the biggest challenges is actually not the heating itself, but the buildings. The buildings are quite old. Majority of the buildings are over 40 or 50 years old, and because of that, they consume about two to three times more than the counterparts, for example, in Western Europe. And that's even though energy use per capita is quite low, but the energy use per square meter is high just because of the inefficiencies of the buildings.

The heat itself comes largely from fossil fuels, about 83%. That includes district heating and individual boiler and heating systems, and another 14% from unsustainable biomass. So if you look at the chart here, where we've disaggregated electricity and district heating, you can see a lot of black, which is coal gray, which is gas, and brown, which is wood. So really it requires the transformation of just about the entire sector in every country. And because of that, CO2 emissions of the region, about 22% are from the heating sector. So quite significant, as Antonella said, not only is there a greenhouse gas emissions challenge, but it's also highly polluting locally, generating in winter months, 80 to 90%, sometimes of pm, 2.5. So significant air pollution causing over 300,000 deaths a year, and an annual welfare cost of over $300 billion.

All of this dependence on fossil fuel creates a huge problem for energy security. As we saw only two painfully last year, the risk of energy security, global energy, price fluctuations, supply disruptions, all have a huge, huge impact on the countries in the region and more importantly on the households that are trying to keep their homes warm. When the gas prices increased four or five, or more last year, households in many cases were just unable to afford to heat their homes. And that's something we really don't want to see going forward. Despite that, fossil fuel subsidies in the region were quite high, almost over about 115 billion according to the IMF. And because of the combination of high prices, very inefficient supply and very inefficient buildings, a majority about one third of households were energy poor. That means they spent 10% or more income on energy.

Most of that is heating. If you just look at the two slides below, if you look on the left, these are most of the homes that we deal with. Old windows, no insulation, a coal or wood heating, a boiler, they can spend over $2,500 a year in heating costs. But if we can imagine for a moment we're able to renovate these homes, put new windows on, put solar panels, and an efficient heat pump, we can bring the costs really close to zero. And if we just think what that will do, it will basically end energy poverty as we know it. It will significantly reduce emissions, improve air quality, improve energy security. So although it's not cheap, the cost to renovate is probably about $35,000 per home. If we're able to find a way to finance that, the potential benefits could be substantial. In our analysis, we looked at both district heating and individual heating systems for district heating.

We did an assessment of 18. We just sampled 18 utilities to see how they were performing. We looked at about five to seven operational and financial key performance indicators. And the results, despite decades of investment and decades of improvement, were not great. Only about three of the 18 had good financial and operational performance. Eight, they did well in one area but not in the other, and seven had poor performance, both financial and operational performance. So if we're going to invest the billions of dollars needed to upgrade and clean these systems, we need a sea change in terms of the governance structures, the pricing, and the performance of these district heating utilities. They're just not equipped for the transition. We also looked across six countries, both rural and urban homes, both single family and multifamily buildings, just to get a sense of how they fared in terms of what fuels they were using, what types of energy heating systems, and how efficient the buildings were.

In urban areas, we saw mainly district heating, electricity, and gas. In rural areas, we saw mainly wood and coal. And when we did economic and financial analysis, we found that in urban areas it was really air-to-air. Heat pumps tended to have the least economic costs. And in rural homes, the heat pumps did fare well, but because their upfront cost is quite high, we also recommended eco design wood or pellet stoves as well. Most of these analyses really came down to two factors. One is the pricing, mostly on the price of coal, the price of wood, which is very, very low in some countries, which made the financial analysis show that they were quite cost-effective despite the air quality and emission costs. And the other thing was whether or not the home has internal piping, because it's a little bit more challenging to go from air-to-air heat pumps to a water-based system, which uses water pipes with radiators.

But there's a lot of great options available. On the left side, you see some of the options that are being employed for district heating, waste, heat, biomass, geothermal, are among the ones most commonly used. But we also see a lot of pilots in terms of waste and biomass gasification and waste incineration and in solar. There's also a lot of technologies, of course, heat pumps we've talked about. These are large heat pumps that connected district heating systems, low temperature district heating, heat storage and other things. Some countries are even now using their heating system during the summer months to provide district cooling as a way to amortize these very, very large infrastructure costs. On the right side, you see individual heating. We talked about air-to-air, also air to water heat pumps are a great option. Geothermal heat pumps, eco wood stoves, and condensing gas boilers.

There's still some areas where this still came out as the least economic cost. However, we put a little asterisk there to say that gas needs to be used very, very judiciously and is only as a transition fuel to a longer term decarbonization plan. And we can't forget thermal renovations that are extremely important, not only to reduce the amount of energy used, but also to make the heating bills more affordable for the homeowners. We estimated the cost of the transition, and I won't lie, the costs are not low. It came to about two to two and a half trillion dollars for the transition. But if it's broken out by sub-region, about half of this cost is the Russian Federation alone. So if we exclude that, now, we're talking about just over a trillion dollars of investment. But the important thing, as Antonella mentioned, is the economic benefits strongly outweigh the costs.

So despite these costs, the economic net present value is over 400 billion, and it has a positive rate of return just due to all of the enormous benefits that accrue. And if we just take this number in perspective, if we assume that the subsidies on fossil fuels that the ECA countries are spending now, if they continue spending that through 2050, then the cost of the transition is only about half of the money they would spend in fossil fuel subsidies. So just putting that in perspective a little bit, what do governments need to do? Well, there's a number of barriers specific to heating, multi-jurisdictional responsibilities. This spans just about every ministry and every agency. Unregulated markets for solid fuels, uneven access to infrastructure. Some homes don't have access to district heating, they don't have access to gas, and then they're faced with more limited choices.

We talked about the indoor piping, and then just a lack of suppliers and a lack of supply change to be able to provide all of these goods and services that are needed. And so what we've seen based on experience from other countries is you really need a mix of reforms. We talk a lot about energy pricing, but it's also things like certifying biomass that we can make sure that the biomass is harvested, and used sustainably. Energy efficiency codes and standards, air quality regulations, all of these things are really important. And then a mix of financial incentives and instruments as well as complimentary innovations, outreach and behavior change. Critically important technical information and training, market studies, so you can gear the programs to the specific markets you're trying to influence and change. The benefits I mentioned are substantial, more efficient building stock, reduced energy poverty, more affordable heating, energy independence.

The benefits are really, really quite substantial. And so we would love to see our client countries accrue these great benefits. Finally, how did our framework lay out in the report? We felt there was three main pillars to what countries could do to achieve this transition. The first is reducing demand through energy efficiency. In the building sector, this is critically important. We found that we could reduce heating demand by 50 to 55% just through energy efficiency. And if you do the energy efficiency measures first, we can reduce the transition costs by about half. So about one to $2 trillion could be reduced if we just reduce heating demand. And countries are there. Many countries have energy efficiency targets through 2030, long-term building renovation strategies. But now we need to implement them and realize them and finance them. The second is on district heating. We think district heating can be a tremendous value to clients.

In Western Europe, they do extremely well. There's no subsidies that go in the district heating, and many of them are much, much cleaner, but they need to significantly be able to improve performance, and they need to be viable even if heating demand goes down by a significant amount. And we need to find cleaner sources for the district heating, as I mentioned, whether it's waste, heat, geothermal and other. And finally, for the individual heating systems, which is the majority that have just a building level boiler, we need to find more efficient heating systems and much cleaner fuels and be able to provide financing packages, behavior campaigns, training, and all of the things necessary to allow the market to be able to serve this sector. So that's a quick overview. Thank you very much. Turn it back over to Charles.

[Charles Cormier]

Thank you, Jas. I think that you've laid out the case, the business case, and you've talked about the technologies that are available and economic benefits, but also essentially the role of sustainable heating in the transition. So thank you for that. And for all of you who are interested in the report, as Jas said, it's available on the website, and you can get the link and download a very thorough and well-thought-out report.

[Charles Cormier]

... and download a very thorough and well-thought-out report. But let's turn to our panelists to hear from them based on the presentation you've heard. So let me first turn to Stephanie Bouckaert, who's the head of the Demand Sectors unit of the World Energy Outlook at the International Agency. Stephanie, I think the International Energy Agency has been for many years sounding the charge that we need to do the first fuel is energy efficiency, and we've heard that again from Jas this morning, but somehow the countries don't seem to be getting that message. But we heard from Jas as well that if countries did energy efficiency at scale, the cost of transition would be reduced by $1 trillion. He said $1 trillion to $2 trillion. So that's huge, huge savings.

And on top of that, if the region electrified its heating sector, it would also contribute to lower costs for the consumers and lower emissions. So my question to you is what has the IE analysis shown in these areas and what types of policies and programs has the IE found most effective in promoting energy efficiency and electric heating such as heat pumps? Over to you. Thank you.

[Antonella Bassani]

Thank you very much for the question and thanks for inviting me to this live event. And it's great to see this report on space heating because I mean, as it was rightly said, indeed it's crucial to find solutions for sustainable heating, not only for this region but globally, because this heating is really the largest source of energy demand in the building sector globally, accounting for one third of building's energy demand, and accounting for 5% of global energy related CO2 emissions, so from the combustion within buildings. And worldwide, I think around 40% of households require space heating at some time in the year. So with the heating being a major component of home energy expenditures, which was clearly highlighted with these cases in the presentation. So particularly in colder climates such as within this region. And as we have seen from the presentation, but it is the case also globally, heating still relies heavily on fossil fuels, in particular natural gas, which contribute today to around 60% of space heating service demand, and electricity today accounts for around 20%.

So a lower share in terms of meeting service demand for space heating. In the scenarios that we are producing a DIE. So we have three different scenarios, one which is based on the current policy environment and a more ambitious one, which is the net-zero by 2050 scenario. Electricity meets two thirds of the service demand for space heating by 2050. So we see indeed a big role for electrification within the building sectors. And in terms of policy, so indeed maps and building energy codes are really key policy tools to enhance the de-efficiency of heating in buildings. But governments need really to ensure that regulations are well aligned with the pathway to the respective climate targets of the countries, and to ensure also effective monitoring, verification, and enforcements of these policies. As it was highlighted also during the presentation, retrofit comes also with high costs, and costs and convenience are really the primary barriers to stepping up the rate and depth of retrofits that we need to be on the net-zero pathway.

We have also seen in recent years that the cost of insulation materials has increased and that we had seen also supply chain the disruptions and inflation [inaudible 00:27:12]. So retrofitting the average size home can cost thousands of dollars as we have seen, which can pose a significant financial barriers for lower income households. So deeper retrofits also often require additional time and can cause also extra disruptions to occur. But luckily, we have seen also that numerous governance in recent years have offered grants, subsidies, and tax credits, to incentivize retrofits through different kinds of programs. So globally thinking about the US, IRA, also the Superbonus in Italy. And all these programs have enabled to boost retrofit rates substantially, but many of these incentives have already expired, or are due to expired soon. So a number of governments will need to offer new strategies to also standardize renovations and speed up retrofits at lower costs.

So really, I mean this was to highlight the lack and the importance of boosting policies for retrofits. Now when it comes to electric heating and heat pumps specifically, we have seen also that the global energy crisis in 2022 brought risk to heating energy security and affordability, but has also led to unprecedented momentum for transition away from fossil fuel based heating. We have seen that sales of heat pumps have been growing at record levels, 40% year-on-year in Europe, and even exceeding sales of gas furnaces in the United States. And within the latest [inaudible 00:29:02] outlook that we have published last week, already in the stated policy scenario, so which reflects the current policy environments, we see that clean technologies will play a significant greater role than today, already by 2030. And showing that heat pumps and other electric heating systems will outsell fossil fuel boilers globally.

So it's thanks to a range of policies. So I have mentioned already the US IRA, which allocates $22 billion for home energy supply improvements. This is also thanks to our rapport in EU, which aims to have the community of installation of 10 million new heat pumps over five years. This includes also China's 14th Five-Year energy plan, which was published in March 2022, which set clear targets for building retrofits and low carbon heating by 2025, but also additional national strategies such as the one from Chile, the 2021 National Heat and Coal Strategy, which aims to reduce greenhouse gas emission in the heating and cooling sector by 40%, already by 2030 and by 65% by 2050. So we have another scenario also, which is called the APS, where we take into account all the NDCs and the net-zero pledges. And really, within this scenario, we see that if all the governments meet their announced emerging climate related commitments, then heat pumps will serve already as the primary means of the decarbonizing space and water heating.

But the deployment of heat pumps, I mean, as this was highlighted, also needs to come with strategic policy incentives to promote retrofit, and efficient building envelopes as well as demand side response measures. Also, to ensure that heat pumps doesn't put a strain on the per sector through increased electricity demand, especially during peak hours. Household that add a heat pump without improving efficiency in parallel could of course see their peak demand during winter months tripping, which could also have an effect on their builds and would not lower their household expenditures. So higher efficiency envelopes will also lower upfront and operating costs for consumers. So using heat pumps given that they will reduce the capacity of the heat pump required, as you will have a more insulated household.

And currently, we see that most of the installation of heat pumps are concentrated in new buildings and existing single family homes. So there is a need also for governments to seek how they can ensure that policy can tackle also a multi-story apartment buildings and commercial space to ensure that we have also continuous solid growth in that area. Thanks for listening to this and looking forward to the discussion afterwards.

[Charles Cormier]

Thank you Stephanie. And thank you for IEA start leadership and analytics in the clean energy space. Great to have you on the panel. Let me then turn to Matthieu Ballu who's the Policy Officer of the Director General for Energy, Renewable Energy Unit at the European Commission. Matsu, there's no doubt that the EU has been leading the charge on sustainable heating as evidenced by the recent announcement to further strengthen the obligation for member states to increase the share of heating and cooling from renewable energy sources. I think your target now is 1.3% per year, if I'm not mistaken, for every year. So will this be enough to decarbonize the heating sector by mid-century? And I have a second question to follow up. So we've heard from Stephanie all of your targets on the heat pumps, but just turning back to district heating, I just wondered whether since Europe really depends on district heating, which is harder to decarbonize, what strategies does [inaudible 00:33:38] promote to help green the district heating sector? Thank you.

[Matthieu Ballu]

Thank you Charles. Hello everyone. And big thanks to Jess and team for the great report and the opportunity to discuss now. Indeed, big changes recently at EU level. This month, the EU member states and parliament agreed on the revision of the main piece of EU legislation on renewable energy and heating and cooling. Renewable heating and cooling is at the core of this revision. We heard some numbers already, but heating and cooling overall represents about half of the energy consumed in the EU, and more than 70% of that is still from fossil origin. And even if you look at the renewable parts, more than 80% of that is still biomass. So there's still a need for diversification and increased deployment of renewable energy there, which despite our progress on renewable energy overall, and despite the fact that we exceeded our 2020 targets for renewables, we have not yet managed to crack that one.

So part of the objective of that revision is to address this. There is a new overall renewable target for the EU that has been agreed, of 42.5% of renewable energy in the overall energy consumption of the EU by 2030. It's twice today's share and twice the ambition that we had for the current decade under the previous legislation. We are really looking at massive acceleration. And this is across all sectors. For heating and cooling specifically, the main change is that for the first time, there will be a binding target for renewable heating and cooling for all member states. So about half of the yearly increased share will be mandatory. And on top of that, there are national top-ups aligned with our long-term de-carbonization goal, which amount to about 1.8 percentage points per year of increase, which is two to three times the increase rates that we have seen over the past 10 years.

So we are really looking at a very strong acceleration there, a strong signal to investors. And next to this overall target for renewable heating and cooling, a set of other targets that are complimentary. For instance, a new target for the renewable energy used in buildings, not only for heating systems, but energy used in buildings overall. An increased target for renewables in district heating, I'll come back to that one. One for renewables used in industry, which also overlaps and compliments and strengthens the one on heating and cooling. And next to those targets, the renewable energy directive, the new revised law adds a whole new toolbox of measures for member states. Some of them that were already available, some others like a new strengthened definition for heat purchase agreements that will really help find new business models and help member states to find the best way to go about de-carbonization heat in our country.

This legislation is not standalone, it's part of an overall effort that the EU has done in the past years to align the ambition and the tools of our legislation with a trajectory for our long-term de-carbonization. So other legislation will also support the achievement of these targets. The revision of our carbon pricing of the energy emission trading system, the ongoing discussion on our low on the energy performance of buildings, which aims to accelerate renovations and to define pathways towards a decarbonized building stock. Ongoing discussions also on our echo design rules. So the rules for the energy performance of heating appliances, which in our proposal included a phasing out of new gas fuel boilers in the midterm. So again, a very strong signal there. Our financing framework has also evolved. Our recovery and resilience facility already included a target for climate related objectives spending, at least 37% of the whole envelope had to be dedicated to it.

But as part of our strategy to reduce gas imports in reaction to Russia's aggression of Ukraine, the REPowerEU Plan, the plans added a specific dimension on de-carbonization as well, which member states are using to finance renovation, to finance deployment of sustainable heating. Then specifically about district heating and cooling. There are two main aspects. One is our legislation on renewable energy, which has this increased target, but also provisions to support the participation of district heating and cooling systems in the integrated energy systems of tomorrow. So it's really about allowing the operators of systems to find new sources of funding by allowing them to provide flexibility services to the energy system, which will rely more and more on variable renewables and which where thermal storage in particular will be essential. So requirements to integrate them better in planning and in the overall planning, including coordination between electricity grid planning and an assessment of the services that the district heating system can provide.

And the other piece of legislation is our legislation on energy efficiency, the Energy Efficiency Directive, where now the revision draws a clear pathway to the de-carbonization of district heating and cooling systems toward 2050, by an evolving definition of what an efficient district heating and cooling system is, with increasing shares of renewable energy and waste heat that have to be used in these systems for them to qualify, and therefore for them to qualify for some funding for example. The two last points that I could mention before going to the Q&A is on heat pumps specifically, we're working on a heat pump action plan. There was a consultation, broad stakeholder and citizen consultations over the summer and the autumn. And as Stephanie mentioned, the objective is to accelerate the deployment of heat pumps including of large heat pumps for industry, for district heating.

And of course, this is not only something that we're doing within the EU, but we are working with our neighbors. We work, for instance, with the energy community on the implementation of EU legislation in Eastern Europe. So we're currently actively working on provisions from our previous legislation, the one currently enforced in the EU, from renewable heat targets to bioenergy sustainability. And of course, financing, to projects, especially in the neighborhood under our neighborhood policy. I will stop here. Thanks a lot and looking forward to the discussion.

[Charles Cormier]

Thank you Matthieu. So based on that, I think that you'll continue to lead the charge on sustainable heating. Let me now turn to the panelist, Shukhrat Vafaev, who's the Director General of the Agency for Strategic Reforms under the President of the Republic of Uzbekistan. So Mr. Vafaev, we know that Uzbekistan has been relying extensively on natural gas to meet its heating demand, but now we're seeing at least a plateauing or if not a declining of natural gas reserves. So I wanted to hear from you about how do you see the government strategy for the transition to sustainable heating. And secondly, I know that you've been looking at heat pumps. We've heard two panelists speak about heat pumps, which we think could be a game changer for the region. What plans does the government have to encourage the adoption of heat pumps and what types of policies and programs could do so? The floor is yours.

[Shukhrat Vafaev]

Thank you very much for opportunity to speak here. I think it's a very important event which we've been waiting, looking forward for some time. The energy efficiency issues and challenges are as important to Uzbekistan as to any other country of the [inaudible 00:43:31] region, despite the fact that we have abundant energy resources. As you rightly mentioned Charles, our major energy resource is a natural gas so far, and only for heating purposes. For Tashkent City alone, we spent $1 billion [inaudible 00:43:58] meters of gas annually, and the oil consumption of the population of gas, of natural gas reached $12 billion cubic meters of natural gas, which is very expensive and inefficient use of this valuable resource.

So we are fortunately cannot be that proud that as colleagues from the EU, which work very comprehensively tackling the energy efficiency issue through all angles. But nevertheless, we did some progress. First of all, by building up our power generation capacity is based on renewables. Second, we started working, if to talk about the heating in particular, we started introducing co-generation units, which for sure more efficient than traditional way of heating houses and buildings. And the heat pumps in particular, considered by might seem as a very promising and important solution for resolving the massive task and massive challenge we have in the district heating area. We can add to district cooling also, and we very much look forward to pilot and...

[Shukhrat Vafaev]

... to pilot and test it. Because for Uzbekistan, it is quite new technology, new approach to resolving heating issues. And we do have some legal framework, some certain incentives and support provided to any energy efficient technology initiators and [inaudible 00:46:34] actors through the law on rational use of energy resources which stipulates and envisages that the legal and physical legal entities and individuals can get custom duties reduced and the taxes reduced when they import special equipment materials used for improving energy efficiency. There are some state financing programs which provide subsidized laws to entities introducing energy efficient equipment. So the overall framework is there.

Shall I say that I believe we have a big room to fuel and improve? Given that improvement of energy efficiency in general and introduction of heat pumps in district heating and cooling requires us to do a lot of job. First of all to put in place regulations and policies. Second to put in place right institutions which can enforce and oversee implementation of these regulations and policies.

Of course, we need to come up with funding structure and sources given that as was already highlighted by a number of speakers. This is a cost and capital intensive exercise. And of course capacity building is one of the major issues. So we very much look forward continuing working with... We welcome the initiative of the World Bank in preparing this regional report at the beginning. We will study very carefully and I think, I'm sure this report will provide us a lot of answers in resolving the issues I mentioned, but I'm sure there are much more tasks, much more challenges in meeting energy efficiency targets we have and meeting emission reduction objectives we undertook as a government. So I very much look forward to our joint work and joint preparations. Thank you.

[Charles Cormier]

Thank you, [inaudible 00:49:26]. Yes, I think Uzbekistan is very a country that has been dealing with the heating issues and transition and lots of great ideas from you there. Let me turn to Mr. Mirowski. Pawel Mirowski who's the vice president of the management board of the National Fund for Environmental Production and Water Management in Poland. We know that Poland is a country that has a different fuel on heating, so you have one of the most ambitious sustainable heating programs in Europe. We're trying to phase out the use of coal and other solid fossil fuels from the heating sector, in particular 3 million single family buildings, which is called the Clean Air Priority Program or CAP, and the cost is astronomical $26 billion. Can you tell us a bit more about the CAP program and in particular we haven't heard yet, but from homeowners what has been the response? Are they interested in this and are there lessons learned for adjustment to the program that you've made since you started launching it in 2018? The floor is yours.

[Pawel Mirowski]

Thank you very much. First of all, I would like to thank you very much for inviting me to today's meeting. I greatly appreciate being able to share our experiences with you, the experiences with regards to the clean priority program that is dedicated to the owners and co-owners of existing single family buildings. But before I move on to the Clean Air Priority Program, I would like to just reflect in a few words on what previous speakers said. Specifically that improving air quality and energy efficiency of buildings does not only entail single family buildings, but if we speak about the carbonization of the economy, the professional energy sector is also important. Polish government dedicates special programs to this issue including funds from the modernization funds. The national operator of that program is also the National Fund for Environmental Protection and Water Management. 17 programs worth 22 billion zlotys were already launched.

Those are various programs dedicated to industry heating sector, energy sector that are intended to transform the energy sector to the shape that we would like it to be in. Today, however, I would like to focus on the Clean Air Program. It has been implemented since September, 2018 and the great advantage of this program is its comprehensiveness. It is often called an anti-smoke program. So one could think that it is only about the heat source replacement, but this is not just the program of replacement of the so-called smoke belchers, the low efficiency equipment, but also from the very beginning it involved improving energy efficiency of buildings and thermal retrofits. So even then in 2018, ahead of the trend, because even then realized that besides removing the smoke belchers, thermal retrofit of the building is very important. Recently, we have celebrated five years of the program's implementation and given its comprehensiveness and the budget because a budget of 103 billion Polish zlotys and the comprehensive nature of the program means that it must be continually adjusted.

It must be adjusted to the target beneficiaries, but also external geopolitical conditions that change all the time. And of course, I'm not even mentioning the February of last year when Russia attacked Ukraine. So, the program has undergone a number of reforms and has been gradually changed. The reforms started in May, 2020. The program was completely rearranged, restructured. The new structure involves three levels of financing. Of course, the program is based on subsidies that the beneficiaries receive. It is intended to incentivize them to invest in their building and to insulate it and replace the heat source.

Now the investment program is divided into three parts. The basic financing level, the enhanced financing level, and the highest financing level is intended for the families with lowest income. The main assumption is the lower the income of the beneficiary, the higher the subsidy they are eligible for. This had been in place since May of 2020.

We also have to state very clearly that the program is so comprehensive that multiple institutions participate in implementing it. Of course, there are regional funds for environmental protection and water management and they are the ones that implement this program on regional level. The local governments also participate, the municipalities. And they've participated even in 2019 or must, they have joined the implementation of the program in 2020. We have created information desks at municipal offices and the beneficiaries can go and receive information there. They may also receive assistance in filling in the application. They can also file the application there.

86% of all local governments in Poland participate in implementation of the program. So the vast majority of municipalities joined the implementation. This is certainly a factor in increasing accessibility of the program. Industry organizations also participate in implementation because of course everything that is changed and modified in the program is previously subjected to both social consultations and industry consultations. We try to implement any changes in consultation with the institutions and industry associations that later physically implement the program. And of course, last but not least, we have NGOs including a Polish smoke alarm. We remain in touch with them and we consult any changes with them.

The last institution that I'm going to mention, last but not least. Actually, maybe one of the most important institutions from our perspective and the perspective of the program is of course the World Bank. The technical assistance we have received from you in implementing the program is extremely valuable to us and it has been from the very beginning of the program implementation reports that you prepared, that the World Bank prepared, have also served to help us restructure the program. And I think this is a great time to offer our thanks for your technical assistance.

Besides that, we have a number of stakeholders participating in the program. As I said, it has undergone various modifications. We have tried to reach out to the beneficiaries of the program. The changes we had implemented as of January 3rd of this year were formatted successfully enough that the program became very attractive for the beneficiaries. We see that in the number of applications that have been submitted under the program starting from January 3rd when we have implemented a number of changes to the program. 174 applications were submitted to the total value of 9 billion zlotys since January.

I will describe the changes in a moment, but as a result of those changes, our beneficiaries are happy to participate in the program. First of all, we have increased the amount of subsidy that can be achieved under the program. Now one beneficiary may get as much as 136,200 zlotys to replace the smoke belcher and to increase energy efficiency of the building. However, this level of subsidy requires an energy audit. For the highest level of subsidy, we require an energy audit to make sure that the public funds are spent as efficiently as possible.

As I said at the beginning, initially the program was perceived as an anti smoke measure, something to get your smoke belcher replaced. But in all honesty, this is much more than that because today when we have such high prices of energy carriers and today everybody has to make sure to save energy to reduce the operating costs for households.

This very factor, the improvement of energy efficiency factor in existing building stock, single family building stock has come to the forefront. And this was reflected in our revisions. So we have increased the subsidy for the entire thermal refurbishment package and now that the rate has been increased, Polish people are much more happy to apply. Every week 16 regional funds in Poland get about 5,000 applications. That gives us the overall number, the figure I gave you before. So I could say that today this is an excellent financial vehicle for citizens to get funding for thermal retrofit and for a replacement of the old boiler. And first and second, the sequence makes sense. Okay, first, get your retrofit, get your insulation done. And then once the house is insulated, use highly efficient and low emission heat source. This is our message to the recipients. We encourage them to retrofit fast and get the boiler replaced second.

And we have actually achieved that. That's how the program is set up. Another message is that the revisions to the program will allow those who for example had gotten their boiler replaced in the old days, now they want to do the retrofit. They can reapply. And this time they got boiler subsidy first and now they get the subsidy for thermal retrofit.

Now that the subsidy rates are higher and the program is more comprehensive, we have more and more applicants. This money is not revolving. It doesn't have to be paid back. And if you are energy poor, if you are vulnerable, you can even get up to 100% of your project budget. So the program is comprehensive and it offers generous subsidies, which are the two key success factors.

You gave me six minutes, so I wish I could tell you more about it. If you have questions, I'll be happy to address them. But just one final comment. Already in 2021, because I named all the stakeholders five minutes ago. So we also have commercial banks participating. We have a separate track for those who do not have their own money upfront and they can use for a Clean Air loan, they can apply for a Clean Air loan in a commercial bank. And our subsidy can be used towards payment of the principle of the loan. So it's a loan that includes the subsidy component and there's a lot of participants who like to take that loan. In 2022, for example, we have also launched a pre-financing mechanism because in general this is refinancing or retro financing, you have to pay upfront and then you get reimbursed by way of a subsidy. But on top of that, there is a pre-financing. Half of the subsidy can be disbursed before the project is started on condition that the contract with a contractor has been signed for the project. So that's all about the Clean Air Program.

Now let me just tell you that so far throughout the program, 711,000 applications have been supplied for 19,000,000,00 19 billion PLN. This is the total figure over the years, and let me just tell you that individual beneficiaries can enjoy more incentives, not just the Clean Air Program, talking about Clean Air technologies and pollution reduction, we also have multifamily building program. It's called You Warm Dwelling Unit. It is not just single family buildings that are the culprits. Multifamily buildings also cause pollution. So we have multifamily building beneficiaries. There's another program called My Electricity which subsidizes your photovoltaic installation. Over half a million people have applied for such PV subsidy and also it's a heat pump subsidy because my electricity will pay for photovoltaic installation and it'll also pay for a heat pump installation. And if you have a new building with a higher energy performance, we have the program called My Heat. My Heat will subsidize heat pumps in new buildings as well.

Coming back to the Clean Air Program for a moment. In the Clean Air itself, there's some synergy with My Electricity. So your heat source, your retrofit plus your PV, all three can be subsidized with just one application through the Clean Air channel because Clean Air is also available for PV purposes. I'm sorry, I know I run behind time, but this is such a big program. So versatile. I could spend two hours talking about it easily. But thank you very much for giving me at least a snapshot for that. Thank you.

[Charles Cormier]

Thank you, Pawel. I think we can hear the passion of the program into your intervention and if I understood you correctly, one of the successes is that there's a very targeted subsidy and well-designed subsidy, but a huge response from the population. That's interesting to hear. I wanted to open up the floor to... This is a live event and we've had a couple of a hundred people following us on different social media and I wanted to open up the floor to some questions and answers. I'm getting them from my colleagues in Washington, and one of the questions we've been asked from the audience is, "Essentially, what are the incentives for the private sector to come in to support sustainable heating solutions and is it a matter of let's say, working through the consumers to convince them?" And I wondered whether I wanted to maybe ask Stephanie and Matthieu to come back and to maybe respond to that is what could we do to get the private sector more excited about the heating sector and what are incentives for them?

[Antonella Bassani]

Thanks. Happy to come in to comment on this. On the private sectors, indeed, I mean there is a need for governments to send the right signals in terms of policy to ensure that they can follow up with, I mean, the planned supply chains. I think is something that we see now on the heat pump side that indeed there was a big boom in terms of sales of heat pumps and a big expansion. But at the same time now the private sectors, I mean heat pump suppliers are a bit scared of having over capacity because the demand is a bit lagging now. There was a big momentum, but now we need to ensure that demand is there. So I think there is a big need for policy makers to ensure that we have the right signals on the demand side to ensure that then the private sectors can follow with the supply chains and making sure that all these heat pumps that are available now can find the right place in small buildings.

[Charles Cormier]

Great, thank you. Thank you Stephanie. Matthieu, do you have anything to add to that?

[Matthieu Ballu]

Yes. What I can add is that indeed, on the manufacturing side, working on the supply chain as well is essential in general. Simplification and giving clear signals, but also the issue of permitting. So eliminating all the bottlenecks and allowing developers to really be able to understand from the outset how complex and how long the authorization period will take is essential for bigger projects, of course, but also for smaller solutions. Creating new business models. I mentioned, for instance, the rewarding of flexibility services. For instance, allowing heating systems to participate in energy markets is an alternative way to create business models. And in general visibility, and yeah, predictability of the support schemes is very important as well. Stability in general of the policy context and of the financial schemes allows you to really have the confidence to put the investments on the longer time period, so no retroactive, for instance, change in support schemes to-

[Matthieu Ballu]

... active, for instance, change in support schemes to avoid breaking the confidence that you have been building for years.

[Charles Cormier]

Great. So you've both talked about the importance of the supply chain and the role for governments to play there, but also, you both mentioned the strong policy signals that are needed, and stable policy signals. So those are important aspects. One other person in the audience, a couple of people, were asking the question about affordability. We heard upfront from Jaz that from the consumer side, economy wide is expensive for the consumer side. There are ways to reduce the cost, but how would you think about making sure that the energy transition is affordable? And I don't know if Paweł wants to take that or maybe Shukhrat?

[Pawel Mirowski]

Let me maybe comment on that, make an attempt first, but unfortunately we have to be very honest about it. With many programs that we have kicked off, whether for individual customers or for group customers, the subsidies we have in the program, they kind of distort the market because they don't have to be paid back. So the prices of appliances equipment are increased when a subsidy comes into play. That's how the market responds. When there is increasing demand for a technology that is subsidized from one or another support program, what that does is that the industry will quickly take this unfortunate decision to put the price up and the end beneficiary has to pay more. I think it's unavoidable. It is unavoidable, but without the subsidy on the other hand, there is absolutely no way that these objectives could be achieved. Look at how much we have accomplished individual beneficiaries and also institutional beneficiaries too.

Without this extra support, there's no way they would've done all the investments. There's no way they would've carried out all the projects. On the other hand, our subsidies, especially during the pandemic period in 2021, 2022, they were such an excellent driver for the economy, an excellent engine. When I say economy, it's with a capital E at the national scale and also at the local scale where things were getting tough, when companies were going bankrupt, these billions and billions of subsidies that were pushed into the market, they really kept MSMEs alive, Micro and Small Medium Enterprises, they survived thanks to our subsidies. Let me use the example of my electricity where we subsidize PV.

Photovoltaic is 1 PLN, like $1 but 1 PLN, gives us over 6 PLN increase in production. So look at the multiplying factor. That's what the subsidy can do on the market. So when you sum it all up, this is a huge heap of money. I only named a few programs and do we have more programs? We are a national fund, but we're not the only donor. There are more actors who give subsidies. So as I said, the market will be distorted by subsidies because the prices will go up. But on the other hand, the subsidies are an excellent driver. They help the companies grow and they really push the agenda forward. Thank you.

[Charles Cormier]

Thank you for that. So Shukhrat, we've heard from Paweł that subsidies is the way to go. Are you able to target the subsidies for vulnerable and low-income households? I know that the heating sector in Uzbekistan is quite critical, so are you comfortable with that recommendation to use subsidies to protect the poor and to make sure this is affordable? Not sure we can hear you, can you unmute? Yeah. [inaudible 01:13:39].

[Shukhrat Vafaev]

Can you hear me?

[Charles Cormier]

Yeah, now I can hear you.

[Shukhrat Vafaev]

Okay. Sorry about this, technical issues. Well absolutely. Unfortunately, our population in general on average does not have income levels of European Union. But nevertheless, I think the only way to introduce more efficient, more clean technologies is through targeted subsidies. Of course, defining and introducing these targeted subsidies schemes is sometimes rather arms and science. But we benefit from lessons learned by many other countries and of course we'll take them into account. In general, similar to renewables, we'll be providing to poor families, to families who cannot afford high energy bill subsidies for the heating and [inaudible 01:14:58].

[Charles Cormier]

Shukhrat, there's a lot of interest in the audience to understand a bit more what Uzbekistan is planning on. It's let's say it's a sustainable heating program. And can you give us a bit of a flavor of what you have in mind to try to modernize the heating sector in Uzbekistan?

[Shukhrat Vafaev]

Well first of all, we're adjusting in general powered energy tariffs in the economy both for... We started with enterprises which are already paying higher tariffs starting October 1st this year. And the population also will be paying higher tariffs from spring next year. So it's already expected to introduce much better discipline in terms of using energy. Second, we are working now on the set of energy efficiency measures to be introduced at policy and regulation levels. And these policies include usual suspects, energy audit requirement to reach certain level of energy efficiency in using energy consuming equipment, introduction of certain standards and using our universal smart metering system in power sector to better manage demand, especially in very cold and very hot seasons.

Along with that, we're moving to modernization of our district heating facilities and replacing all soviet time built large facilities which spend almost 60% of heat generated for heating the streets. We're replacing them by smaller compact heating units which provide services for smallest number of apartment buildings and houses, but with much less losses. There is a government sponsored program which aims reduction of losses at the building apartment block levels when the buildings receive additional installation and roofs are reinforced, windows are replaced, doors replaced, basically trying to reduce all power and heat losses. And at next stage, of course we are very excited by the opportunities provided by this new technology, new [inaudible 01:18:17], even though we understand that the basic physics of heat pumps commonly is a common knowledge. We actually learned in some way in sixth grade in schools, but never was used in Uzbekistan.

So we're very much looking forward to pilot in a very short period, the first heat pump for certain local district heating unit and to demonstrate to everybody that this is technology which can perform, which can provide heat and we'll take it from there. Of course, we'll need private sector participation given that the capital requirement is criticizable if you take it across the company. So against that, we'll need to establish bankable and attractive for private sector framework and structures, which would enable on one hand makes this investments in new facilities and new equipment and new infrastructure including apartments, infrastructure pipes, but also to make this investments for private sector confidence so that they can recover their investments in a reasonable period of time.

For that, of course the government will step in with certain undertakings related to supporting the credit of the buyer of the heat with certain undertakings to provide subsidies for consumers for whom is difficult to afford higher energy bill and all other related policy support measures which are used in this kind of situation. In general, unfortunately unlike for power sector even for gas sector, in the district heating and heating system sector as of now use a bit fragmented legal framework. So there is a lot of work both on policy side and regulation side, but also on commercial and investment side for introduction on a massive scale of this new heat pump technology [inaudible 01:21:13]. Thank you.

[Charles Cormier]

Thank you Shukhrat. So as you've heard from our colleague from Uzbekistan, they're looking at all fronts, the policy front, energy pricing subsidies, and then on the technology front moving straight ahead and very open for business for heat pump so good to hear that. If you allow me, I'll have one more question because there's a lot of chat on the webpage, maybe I come back to Paweł. Paweł, there's a lot of interest in the technology innovations that you may have brought in Poland on the heating sector so we know that the EU and Poland in particular has had lots of issues around what's eligible for support and what's not. So maybe you can share a bit about the technology front what do you see in the heating sector going forward?

[Pawel Mirowski]

Thank you very much for this question. Well, looking at the structure of applications submitted under the Clean Air Programme as of today, when I look at the appliance, because of course the catalog of appliances that are eligible for financing is rather broad, but if we put categorize them, today 50% of applications, half of the applications under the program pertain to heat pumps. So these are the applications that include a heat pump. This has actually changed because in 2022 the amount of applications involving heat pumps reached 63 to 64%. Now it became slightly lower, 50%. Wood biomass, so pellets but also wood gasification boilers is approximately 20%, and 33% are condensation gas boilers, 1% are other devices that are eligible for financing. The applications involving the heat pumps, they also include photovoltaic installations actually almost on a one-to-one basis. So the beneficiaries choose to provide power for the heat pumps that they intend to install. They want them powered by solar energy. The Clean Air Programme makes it possible. So you can apply for a photovoltaic installation in the same application as you apply for the heat pump.

Starting from January 22, it is not possible to finance coal-fired boilers. I want to make it very clear, anything coal-fired is not eligible, so no subsidy is provided to those heating sources. The changes we have implemented as of January 3rd mean that even if somebody has the technical option to connect to the gas mains, they do not have to install gas heating source, they may install a different heat source. We have specifically made this modification to provide sources other than gas, even though Poland is well supplied with gas and there is no problems with providing it to households. But nonetheless, we decided to open the catalog of eligible equipment and allow installing different heat source even if gas main is available.

Poles also very often use hybrid solutions. So if previously they have installed a gas condensation boiler, co-finance from cleaner program and now they want to install a different heat source and keep the gas boiler as the so-called peak time source. Now they use subsidy from another government program that is called My Electricity and we have opened a possibility for them to apply for a heat pump in that program. So they create a combo. The main heating source is the heat pump and when the atmospheric conditions, when the weather becomes such that the heat pump is no longer an efficient heating source because especially in Eastern Poland, the temperature often goes below -20 in the winter, then the gas boiler becomes the peak time heating appliance and our heat comfort is ensured.

So I have told you what Polish citizens invest in, but now we have something new. It could seem that there are many multiple programs, but they are devised in such a way that they compliment each other and they work with each other. And I may not sound very modest, but I do believe that the result of our success is absence of cannibalization of programs. They do not overlap because if you have multiple programs, it is important to design them in such a way that they compliment each other rather than overlap each other. So Polish citizens may use a number of sources to finance different activities and they select the mechanisms that they believe are best.

Of course, we have also more targeted programs. I was talking about individuals so far, but we also have a thermal retrofit fund and this is a huge number of programs intended for other segments, industry, local governments on municipal level and county level, they can receive co-financing. We have for example, co-generation or energy production co-generation for heating sector. Those are programs also digitization of heating networks. We use a lot of alternative fuels for energy productions, for example, we have waste incinerators, we have support for energy intensive industry development of co-generation based on municipal biogas, renewable energy sources as source of heating in the heating sector. There are multiple segments. So as you see, individual clients are one thing, but institutional approach to decarbonization and transition of energy and heating sector involves a number of other programs implemented by the National Fund. Thank you.

[Charles Cormier]

Thank you Paweł. So we have a lot to learn from Poland and from its design of its very effective programs to bring energy efficiency and sustainable heating. With that, I have to say that unfortunately we're running out of time, but I wanted to really thank you for participating and for sharing with us the idea of sustainable heating for all of you who participated online and many great thanks to the panelists and to Jaz, but to Stephanie the panelist, Stephanie Meter, Shukhrat and Paweł, for sharing their very, very rich experience.

There's a lot of things happening in the sector in the region and we hope to that you stay tuned. So I wanted to also give a special thanks to the Energy Sector Management Assistance Program, ESMAP for the financial technical assistance that helped us prepare this report. ESMAP is a partnership of about 20 partners that help low and middle income countries reduce poverty and boost shared prosperity through sustainable energy solutions.

From the World Bank, which you will see is on next steps is that we look forward to working with individual countries and clients and people that are struggling in Europe and Central Asia to develop sustainable heating roadmaps, that's the first step. We'll continue to share our knowledge and lessons across countries based on experiences from this transition. You heard today some examples from learning from one another, and we look forward to continuing to partner with other organizations such as the IA and the European Commission to promote sustainable heating. So with that, stay warm and have a great day. And greetings from Baku.