EBRD Places Premium on Energy-efficiency Projects
Powering Russia to Prosperity

The European Bank for Reconstruction and Development (EBRD) has been placing special emphasis on its Sustainable Energy Initiative, under which it finances energy efficiency projects and renewables, such as hydro and wind power.
In 2006 the EBRD's investment in sustainable energy totalled €750 million. The Bank also continued to support restructuring of the power sector, particularly in Russia.

Electricity Generation
In 2006 the EBRD provided financing of €390 million projects in the power and energy sector and attracted a further €900 million of syndicated funding in support of these projects. The countries to benefit included Albania, Armenia, Azerbaijan, Bosnia and Herzegovina, Georgia, Poland and Russia. Financing was provided in the form of private sector loans, equity investments, local currency financing (provided in roubles), state-guaranteed loans, and loans without state guarantees.
The EBRD continued its major role in financing the restructuring of Russia's electricity sector with three major transactions: Mosenergo, Hydro OGK, and OGK-5. The urgent need for investments to raise efficiency, to replace ageing infrastructure and to cut power losses was highlighted during the exceptionally cold spell in January and February 2006 when the power system came under considerable strain.
Early in the year, the Bank successfully syndicated to a group of commercial banks a large proportion (€124 million) of the EBRD's €190 million loan to the Moscow power utility, Mosenergo.
Provided to finance the cost of refurbishing 17 power stations in the capital and the surrounding region, the loan will help to meet the fast-growing demand for power and heat in Moscow and beyond.
The syndication was a milestone in the Russian rouble loan market in that it involved six leading international banks and the longest-ever tenor for a rouble transaction syndicated on the market. It was also the first time that the EBRD's syndicated loan structure (with the EBRD remaining lender of record for the full amount) had been extended to the local currency lending market.

Modernization Programme
Later in the year, the EBRD extended a 2.3 billion rouble (€66 million) loan to Hydro OGK, a subsidiary of Russia's main power utility RAO UES, for the modernisation of hydro power plants in the Volga-Kama cascade, one of the country's largest sources of hydro power. Nine commercial banks participated in a syndicate to provide a total of 4 billion roubles (€120 million). This transaction, with a tenor of 10 years, overtook Mosenergo as the longest-ever local currency loan to be syndicated. The modernisation programme will extend by at least a quarter of a century the life of nine power stations in the cascade. Once the reorganisation of Hydro OGK has been completed in about five years' time it will become the world's second-biggest hydro generating company.

Hydro-generation
Hydro generation is the main source of renewable energy in Russia, providing 20 per cent of all the power produced. It acts as the backbone of the power industry, stabilising supplies and maintaining the reliability of the country's entire system as well as generating economically efficient electricity. The government has now put Hydro OGK in charge of developing all renewable energy resources in Russia, including wind farms, tidal and small hydro projects. The EBRD has secured grant financing from the Spanish government to assist Hydro OGK in the development of a regulatory framework for wind farms.
The EBRD's third project in Russia's electricity sector was a €27 million equity investment in OGK-5. This was provided through the first public offering of one of Russia's wholesale generating companies.
The EBRD significantly increased its investment in energy efficiency projects in 2006.
The EBRD's increasing focus on renewable energy was further demonstrated by an EBRD loan of €8 million to complete the modernisation of the Enguri dam and power station in Georgia. Enguri currently generates about 35 per cent of Georgia's power consumption, which should increase to 40-45 per cent when the modernisation is completed.
Another renewable energy project signed by the EBRD in 2006 was a loan of up to €5 million to Cascade Credit, a credit organisation based in Armenia, for investments in mini-hydro and other renewable projects. This project is important for Armenia, one of the Bank's poorest countries of operations, as it should reduce the country's dependence on imported fuel for power generation and will increase the security of energy supplies.
In 2007 and beyond the EBRD will continue to focus on energy efficiency, renewables, the regional integration of power markets (particularly in south-eastern Europe), power market restructuring (for example, in Russia) and privatisation.

Energy Efficiency
The EBRD significantly increased its investments in energy efficiency in 2006. A total of €670 million of EBRD financing was devoted to achieving lower energy use per unit of GDP in the Bank's countries of operations.
Excluding supply-side projects, such as power generation and transmission, the Bank's investment more than doubled, to €415 million. This increase in business volume reflects the EBRD's growing emphasis on energy efficiency, as outlined in the Bank's new Energy Policy and in the launch of the Sustainable Energy Initiative (SEI).
Under the SEI, the EBRD aims to tackle climate change by addressing the wasteful and polluting use of energy. EBRD investments in energy efficiency, renewables and clean energy projects will be combined with donor-funded initiatives to address the barriers to investment in sustainable energy.
Another reason for the higher volume of investment in 2006 is the reorganisation of the EBRD's energy efficiency team and greater understanding in the Bank's region of operations of how improvements in energy efficiency can help companies achieve greater competitiveness and reduce wastage at a time when the supply of energy cannot be guaranteed.
EBRD investment in the restructuring of Russia's electricity sector is helping to improve the reliability of power supply to cities throughout the country.

Charging up Russia's power sector
One of the most ambitious elements in Russia's project to dismantle old state controls of its economy is the reform of a once-centralised state electricity business, splitting it into separate generation, transmission and distribution companies and turning yesterday's unwieldy monolith into tomorrow's multi-player market.
As the Russian economy grows, and electricity consumption rises by more than 5.0 per cent a year (making it ever more important to rebuild the nation's outdated energy infrastructure), RAO UES, Russia's largest power utility, is being split into separate generation, transmission and distribution companies.
The EBRD's pivotal role in this giant reform is confirmed as the first shares in one of the new generation companies are sold to private investors. In November 2006 the EBRD threw its weight behind a landmark first initial public offering by one of Russia's six wholesale generating thermal companies by acquiring a minority stake in OGK-5.
This investment is part of the strategy of OGK-5's controlling shareholder, RAO UES, to raise private funding on the open capital market for the investment programme. The Bank's decision to take about 7.5 percent of the equity publicly reaffirms the EBRD's support for the latest phase of Russia's power sector reform.
The EBRD participation in OGK-5 was conditional on the company agreeing to improve environmental performance and corporate governance. A Memorandum of Understanding was signed incorporating these requirements. European Bank for Reconstruction and Development.
The EBRD was particularly active in pursuing energy efficiency opportunities in the manufacturing sector where projects totalling €188 million were signed, an increase of 80 per cent. This high level of investment was due to the Bank's unique combination of energy efficiency expertise, systematic screening of energy efficiency issues in all EBRD projects, the practice of providing free energy audits to clients and increasing interest from the public and private sector in purchasing carbon credits generated by these projects.

Mittal Steel
One of the most important projects signed in 2006 was a €152 million investment in Mittal Steel in Ukraine, which included a €46 million component to finance energy efficiency improvements in the company's steel mills. This is a particularly significant investment as Ukraine remains one of the most energy-intensive countries in the industrialized world and its steel sector needs substantial financing to comply with modern requirements of energy efficiency and to adjust to fast-rising energy costs. Elsewhere in Ukraine, the EBRD provided a €76 million loan to Alchevsk, an iron and steel works, to reduce greenhouse gas emissions. Both these projects involved the purchase of carbon credits.
Another way that the EBRD promotes energy efficiency is to provide targeted credit lines to local banks for on-lending to households and companies that wish to undertake energy efficiency projects. In 2006 this accounted for €81 million of the EBRD's energy efficiency investments, an increase of 40 per cent on 2005. New loans were provided to banks in Bulgaria and a new credit line framework was approved for Ukraine. The first loan under this new framework was provided to Kreditprombank.
The EBRD aims to roll out similar schemes in Croatia, Georgia, Hungary, Poland, Romania, Russia and the Slovak Republic. The EU has approved funding of €24 million to support credit lines in Bulgaria, Croatia and Romania. Discussions with other donors are also under way regarding the grant component of these schemes.
The EBRD also significantly improved energy efficiency in the municipal sector through an investment of €88 million in water supply and waste-water projects (for example, more efficient pumps), district heating transactions (reducing network losses) and urban transport projects. For example, an investment in the transport network in Pula, a popular tourist destination on the Croatian peninsula of Istria, will promote increased use of public transport and significantly reduce air pollution and greenhouse gas emissions.
Finally, the power sector attracted €55 million of investments in energy efficiency in 2006, or €310 million if supply-side investments in generation and transmission are included. One of the highlights of 2006 was the Azdres project in Azerbaijan, which will dramatically reduce the carbon emissions of the country's largest plant thanks to a combination of energy efficiency improvements and a switch of fuel from heavy oil to gas.
An EBRD investment of €152 million in a Mittal Steel plant in Ukraine signed in 2006 includes €46 million to finance energy efficiency improvements. European Bank for Reconstruction and Development.