Ministry of Foreign Affairs EUN j.nr.: 2014-6458. Program for vedvarende energi og energieffektivisering 2014-17.

External Grant Committee meeting 9 September 2014 Agenda item no.: 4 1. Title: Renewable Energy and Energy Efficiency Programme

(REEEP) 2014-17

2. Partners: Ministry of Energy and Coal Industry of Ukraine, Investment Fund for Developing Countries (IFU), Eastern Europe Energy Efficiency and Environment Partnership Regional Fund (E5P RF)

3. Amount: DKK 40.0 million 4. Duration: 2014-2017 (39 months) 5. Presentation to the Programme Committee

24 April 2014

6. Previous grants: DKK 39 million (403.Ukraine.1-15. Eastern Europe Energy Efficiency and Environment Partnership E5P, approved 18 November 2009, agreement with EBRD signed 22 November 2011)

7. Strategies and policy priorities: Denmark’s strategy for development cooperation: The Right to a Better Life Danish Neighbourhood Strategy 2013-2017 Danida’s Strategic Framework for Natural Resources, Energy and Climate Change: A Greener World for All

8. Danish national budget account

code: § 06.32.11.10.41, Naboskabsprogrammet, Programindsatser

9. Desk officer: Anne Birgitte Hansen

10. Head of Department: Uffe Balslev 11. Summary: Countries in the European Neighbourhood region are challenged by dependence on energy imports and inefficient patterns of energy consumption and production which affect their international competitiveness and economic growth and aggravate energy poverty. By improving energy efficiency and increasing penetration of renewable energy the programme aims at reducing the cost of energy in the private, household and public sectors, greenhouse gases emissions and energy imports, as well as the cost of public subsidies to combat energy poverty. The programme supports public and private investments in energy efficiency and renewable energy as well as production of reliable data on energy consumption and supply and insights from analyses with a view to enable the formulation of well-founded policies and result-focused action plans.

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Thematic objective

The thematic objective of the Renewable Energy and Energy Efficiency Programme 2014-2017

(REEEP) is “improved energy efficiency and increased penetration of renewable energy reduces the

cost of energy in the private, household and public sectors, greenhouse gases emissions and energy

imports, as well as the cost of public subsidies to combat energy poverty.”

Presentation of the programme

The 40 million DKK “Renewable Energy and Energy Efficiency Programme 2014-2017 (REEEP)” is a

component under the intervention area “energy efficiency (EE) and green technology” of Pillar 2 of the

Danish Neighbourhood programme 2013-17, which aims at “promoting sustainable and inclusive

economic development” in the target countries. REEEP finances three engagements:1

DKK 15 million are allocated to an “authority-to-authority” cooperation between the Ukrainian

Ministry of Energy and Coal Industry (MoECI) and the Danish Energy Agency (DEA) on

energy planning methodologies and approaches carried out under the framework of a “Ukraine-

Denmark Energy Centre” (UDEC).

DKK 15 million fund IFU’s Neighbourhood Energy Facility (NEF) for the 2014-17 period;

however DKK 4 million of these are held in reserve as unallocated funds. NEF is a grant

finance instrument linked to three IFU-managed investment funds: the Investment Fund for

Central and Eastern Europe (IFCEE), the Investment Fund for Developing Countries (IFU),

and the Danish Climate Investment Fund (DCIF). It promotes greening of non-climate related

projects which IFU-managed funds invested in and development of new climate-related

projects for possible co-financing by IFU-managed funds in the Neighbourhood region.

DKK 9.5 million are allocated to the Eastern Europe Energy Efficiency and Environment Partnership

Regional Fund (E5P RF), a grant facility managed by EBRD, which co-finances public sector

energy and environmental projects resulting in energy efficiency gains in Armenia, Georgia

and Moldova developed and debt-financed by EBRD, EIB, IBRD, NEFCO and NIB.

Thematic, Regional and National Context

In terms of energy consumption most countries in the European Neighbourhood region face a triple

challenge: Firstly, they are highly dependent on imports for their energy needs, which constitute a major

burden to their economies. Secondly, consumption and production patterns in these countries are

highly wasteful and characterized by inefficiency, which affects their international competitiveness and

sustainable economic growth would require significant changes to these patterns. Thirdly, the political

crisis in Ukraine has underlined that energy security can become a matter of national security interests

in case of high dependence on energy imports from one supplier, as is the case with many countries’

dependence on a gas supply infrastructure based on imports from Russia.

In countries like Ukraine, Armenia, Georgia and Moldova the increased fuel prices charged by Russia

immediately after independence in 1991 forced the governments to subsidize the cost of energy to

defend the purchasing power of their households. Although intended as an interim measure, the

Governments felt trapped by low household incomes into a continuation of the subsidy policy. Full

1 Of the total budget of 40 million DKK. 0.5 million DKK are reserved for the cost of the mid-term review.

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cost energy pricing would push the energy expenditures of the lowest income quintile of households

and some in the second lowest quintile above the energy poverty threshold, which conventionally is

defined as “households spending more than 10% of disposable income on heating and cooking”. In

Moldova about one third of the average household budget is absorbed by energy costs. The situation

in Ukraine would be similar for many households if Russia’s 70% increase in the price of gas in 2014 to

US$480 per 1000m3 were to be passed on fully to household consumers.

As part of the EU integration process Neighbourhood countries are required to adjust their energy

policies and laws to the acquis communautaire in areas such as energy efficiency (EE) and increased use

of renewable energy (RE), as well as to consider climate goals and reduce greenhouse gases (GHG)

emissions. For instance the recently concluded Association Agreements between the EU and Moldova,

Georgia and Ukraine, respectively, included adoption of EU’s Third Energy package as a condition of

the Deep and Comprehensive Free Trade Agreement element of their Association Agreements. All

Neighbourhood countries have with different levels of ambition adopted policies and/or laws on EE

and RE and the Danish support in the field of energy is thus based on partner countries’ own policies.

In addition to the political commitment to energy sector reforms at national level the political

willingness to change the system is also apparent at regional and municipal level. In Ukraine, Georgia,

Moldova and Armenia more than 78 cities with a total population of 10 million are signatories to the

Covenant of Mayors, an EU initiative involving voluntarily commitments by municipalities to

reductions in GHG emissions and energy use.

In Ukraine the Government is committed to increase gas prices and utility tariffs to full cost coverage

levels by end of 2017 through a series of stepwise adjustments during the next three years. It is one of

the conditions included in the covenants for IMF’s US$17 billion loan package warded end of April

2014. As a step to depoliticize tariff setting the responsibility for setting tariffs for district heating,

water supply and sanitation was transferred in 2011 from the municipalities to the National Communal

Services Regulatory Commission. The reform includes introduction of heat metering in buildings to

create incentives for energy saving and, very importantly, the introduction of compensation payments

to protect lower income households from the impact of higher tariffs.

The Ukrainian power industry is dominated by nuclear generation (47%) and thermal plants (44%).

Hydropower generation accounts for 6%; other renewable energy (RE) sources such as wind, solar,

geothermal, and small-scale hydropower account for 1% of total power generation. Political support

for RE-power supply is weak for three reasons. One is overcapacity in generation. A second is RE-

support policies: excessive feed-in-tariffs dictated by oligarchic interests turned investments in solar

power plants and wind farms into pure economic rent seeking. The third is that intermittent power

supply from wind farms caused absorption problems in regional grids because of the concentration of

wind power capacity in these. The Ministry of Energy and Coal Industry (MoECI) has asked for

technical assistance (TA) by the Danish Energy Agency (DEA) on optimal integration of intermittent

power supply.

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Ukraine has adopted a national EE-law and RE-law, quantitative targets for EE and for RE in 2020,

and EE and RE Action Plans. Yet, although the preparation of the Action Plans complies formally with

the EU’s EE and RE Directives, the quality of these was impaired by a lack of quality data on energy

consumption and supply (national energy balance). Inability to provide the UN Framework Convention

on Climate Change (UNFCCC) with quality data on the country’s GHG-emissions led the UNFCCC to

ban Ukraine from getting Joint Implementation-projects recognized, meaning that the Ukraine lost

access to a potentially important source of finance for reduction of emissions. The Ukrainian MoECI

has asked to receive TA from the DEA on developing a new national energy balance, the State

Environmental Investment Agency of Ukraine (SEIA) has asked for TA in developing an efficient

national GHG-registry system and the State Agency for Energy Efficiency and Energy Saving in

Ukraine (SAEE) has requested TA in collecting and monitoring micro-level data on energy

consumption in industrial sub-sectors.

Key experiences from previous support

Denmark has positive experiences from cooperation with China regarding a national centre for

renewable energy in China. The centre has provided input to Chinese policy making, inter alia based on

scenario analysis for increased penetration of renewable energy, software tools and instruments for

policy analysis. After adaption of the tools to the situation in Ukraine and provided data collection

methodology in Ukraine is improved, these analytical tools have a potential for use in Ukraine to

identify least cost options in connection with energy planning and RE policy decisions in Ukraine.

As manager of IFCEE and of IFU, IFU has since 1989 invested with Danish companies in 60 project

companies in the Neighbourhood countries with a total investment of DKK 3.2 billion. The majority

of the projects are within agriculture, wood- and metal processing and real estate. Worldwide, IFU had

at the end of 2011 entered into 23 climate projects with investments of DKK 804 million. The pipe-line

of projects located in Neighbourhood countries includes two wind-farms, one solar PV plant and one

manufacturer of building materials with a thermal insulation effect; the size of investment ranges from

DKK 2 million to DKK 600 million.

The E5P window for Ukraine became operational in 2011 and Denmark contributed DKK 39 million

to E5P during the 2011-14 period. In the Ukraine, approved E5P projects co-finance modernization of

district heating networks, EE in public buildings, water/waste water rehabilitation, and TA to

regulatory reforms. Municipal authorities are the public counterpart for the first three project types, the

central government for the last. The co-financing is typically done as follows:

In a district heating (DH) project, the international financial institution (IFI) debt-finances

the investments made by the utility in upgrading the DH-system. E5P grant-finances the

installation of the building-level heat substations for hot water preparation inside the

connected buildings; this enables consumers to adjust their heat flow and pay according to

metered consumption.

The public sector EE projects aim at delivering over 30 per cent of energy savings in the

public buildings. The E5P investment grant finances long term pay-back measures of over

seven years, whereas the debt finance provided by the IFIs through a local finance

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intermediary finances a package of measures with shorter pay-back periods.

In water and sanitation utility projects, E5P grant-finances the specific EE-components.

Rationale for the intervention – theory of change

The “green growth” case for Denmark’s assistance to increased RE & EE in the target countries has

four aspects. (i) The countries are net importers of fossil fuels: Ukraine’s net energy import amounted

in 2011 to 32% of national energy demand, Armenia’s to 67%, Georgia’s to 68% and Moldova’s to

96%. Inefficiencies in energy consumption lead to imports which hold back economic growth by

siphoning off domestic purchasing power. (ii) The share of energy intensive industries is relatively

high; and inefficient use of energy affects their international competitiveness. (iii) Investments in EE

are more labor intensive per invested euro than investments in energy supply. Investing in EE,

therefore, leads to net employment creation. (iv) Investing in EE and supporting the introduction of

metering and control systems as well as consumption-based billing contributes to reducing energy

poverty.

E5P RF supports public sector projects, NEF private sector investments in EE&RE. Supporting both

is prudent risk management. It is reasonable to assume that private clean energy projects provide

similar sustainability, social and economic development benefits; except that the poverty alleviation

impact of public sector projects is likely to be stronger.

Human rights based approach

The principles of non-discrimination, participation, transparency and accountability have guided the

choice of implementing partners. IFU has a solid corporate social responsibility (CSR) policy which

includes issues such as human rights, labour rights, anti-corruption, working environment and

companies’ relations to local communities. By choosing IFU as implementing partner for NEF it is

ensured that CSR standards will be considered in the decision making process leading to the award of

support from NEF.

EBRD and the other IFI’s which receive funding from E5P RF also have CSR policies or similar

policies. EBRD itself has in May 2014 adopted a new environmental and social policy which explicitly

recognises the responsibility of clients and their business activities to respect human rights and avoid

infringement on the human rights of others. The EBRD is committed to the principles of transparency,

accountability and stakeholder engagement and will on an on-going basis provide information on its

performance on environmental and social issues. The EBRD will undertake environmental and social

appraisals and has set up a number of performance requirements for key areas of social sustainability.

EBRD is committed to gender equality and expects its clients to identify any potential gender specific

and disproportionate adverse impacts, undertake mitigation measures and promote women’s socio-

economic empowerment with respect to access to finance, services and employment.

The work of the UDEC will be guided by HRBA principles in its relations with collaborating

institutions and external stakeholders.

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Justification for chosen approach according to the five DAC/OECD criteria

The approach is efficient in terms of costs of programme management. E5P RF has low costs because

the projects it finances are developed by the IFIs; E5P RF pays a fixed management fee in the amount

of 2% of the total amount of contributions paid into the fund to the fund manager (EBRD). NEF has

a lean management because it can use the existing infrastructure of the three IFU managed funds –

IFU, IFCEE and DCIF - to develop and implement its projects; the cost of the staff is born by IFU.

The transaction costs of UDEC are low because the Center facility is located within the Ukrainian

Ministry of Energy and Coal Industry and staff from collaborating institutions stay in their normal

work places.

Effectiveness will be high because the interventions are demand driven both on the TA side, as well as on

the investment promotion side. UDEC gives TA to solve specific technical issues considered to be

crucial by the requesting institutions; a fact which will also ensure the sustainability of the capacity

building. The funds allocated to NEF and to E5P RF are expected to leverage a significant amount of

investment finance: E5P RF from its implementing IFIs; NEF from the IFU managed funds and their

private co-investors. E5P approval procedures have a harmonizing impact on the investment and

financing strategies of the IFIs and on their policy discussions with government authorities on matters

of policy; it reduces the scope for negative competition for projects.

The impact of the DKK 40 million contribution on green growth and poverty reduction in the

Neighbourhood region promises to be quite high. UDEC’s TA to policy-making institutions helps to

reduce obstacles at macro-level which hinder investments at municipal and private level. The greening

of IFU-financed projects through NEF ought to have a lasting effect on future IFU-investments; one

would expect IFU-assessments of a potential share capital investment in a company to include looking

into financially viable EE&RE investments as standard practice. The investments supported by E5P

RF have a strong poverty impact: they reduce energy poverty by reducing the cost of supply from DH.

Consumption-based billing provides better transparency to customers and incentives to conserve

energy.

From the above, the relevance of the engagement for the promotion of sustainable green development,

employment generation and poverty reduction is obvious.

The sustainability is high. In UDEC the outputs are produced by the three national institutions

themselves to solve problems in the performance of their institutional duties identified by themselves

with TA from DEA. In NEF, the “greening of IFU companies” is likely to inspire other companies

and investors to invest in EE. The investments co-financed by E5P RF have long-lasting energy

savings effects – more than 20 years – and are used by the implementing IFIs to promote structural

changes in Government policy and regulation with positive impacts on long-term sustainability.

The REEEP activities have high synergy effects with other Danish Government financed development

activities. Denmark is supporting the fossil fuels subsidy reform agenda through its support to the

World Bank Energy Sector Management Assistance Programme and to the International Institute for

Sustainable Development. These institutions and the IMF are paying close attention to measures to

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mitigate the social impact of energy subsidy reforms in Ukraine and the other key target countries. In

October 2014 subsidy reform issues will be discussed at the Global Green Growth Forum and the

ESMAP Knowledge Exchange.

Summary of selected development engagements

Development engagement 1: Ukraine-Denmark Energy Centre (UDEC).

The engagement objective is: “Reliable data on energy consumption and supply and insights from

simulations about complex system interactions enable the formulation of well-founded policies and

result-focused action plans for energy efficiency and renewable energy, the quantitative targets of which

being monitored during implementation with the help of well-functioning data collection systems.”

The Ukraine-Denmark Energy Centre (UDEC) is based on a “authority-to-authority” technical

cooperation between the Ukrainian Ministry of Energy and Coal Industry (MoECI) and the Danish

Energy Agency (DEA) which is supported by DKK 15 million of REEEP funding and Ukrainian

Government contributions in the form of office space for the Center within the premises of the

Ministry and staff and local costs to implement the activities. The Center will facilitate TA from DEA

also to the State Agency for Energy Efficiency and Energy Saving (SAEE) and to the National State

Environmental Investment Agency of Ukraine (SEIA).2 All three institutions have identified

weaknesses in their data and planning work which they intend to address with relevant TA from DEA

staff and international and Ukrainian consultants. Requests for TA from DEA received so far include:

software programs for energy planning as a problem solving tool; assistance in improving the

methodology of establishing the national energy balance; assistance in managing the integration of

intermittent RE-supply into the grid; assistance in how to monitor the development of energy

efficiency by industrial sub-sector; assistance to improving the methodology of establishing the

calculation and registering the annual GHG-emissions.

Development engagement 2: Neighbourhood Energy Facility (NEF)

The engagement objective is: “Increased energy productivity and resulting lower costs of private companies

and expanded green economy sector in Neighbourhood countries, as a result of investments

undertaken by companies in which IFU through its managed funds is or has been an investor in or is

considering investing in”.

DKK 15 million from REEEP will fund IFU’s Neighbourhood Energy Facility (NEF) a grant finance

instrument linked to three IFU-managed investment funds: the IFCEE, IFU, and the DCIF. Reacting

to applications from private investors, NEF will grant finance feasibility studies either (i) for the

“greening” of companies which IFCEE or IFU have invested in or are about to invest in, or (ii) for

new climate-related projects looking for finance from either IFU or DCIF. Projects in Albania,

Belarus, Bosnia and Hercegovina, Georgia, Kosovo, Moldova and Ukraine are given priority in the

2 The State Statistical Institute will be an important collaborating partner in relation to the National Energy Balance, UNFCCC reporting and data collection and monitoring.

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allocation of NEF-funding, but NEF can support projects also in Armenia, Azerbaijan, Macedonia,

Montenegro, Serbia and Turkey.

Requests for funding are demand driven. Applicants are private companies who consider undertaking a

climate-related project investment in cooperation with a Danish partner, e.g. a technology supplier or a

co-investor. IFU’s investment committee decides on the award of an application.

Development engagement 3: Eastern Europe Energy Efficiency and Environment Partnership

Regional Fund

The engagement objective is: “to allow a harmonised and effective delivery of international financial support

over several years by pooling non-reimbursable contributions made by members of the EBRD and/or

other public entities, to be used primarily for supporting energy and environmental projects, resulting in

significant energy savings, reduction of carbon dioxide (CO2) and other greenhouse gases (GHG)

emissions in Armenia, Georgia and Moldova”.

DKK 9.5 million are allocated to the three national windows of the E5P Regional Fund (E5P RF), a new

grant facility of the E5P Partnership. Whereas the E5P funds projects in the Ukraine, the E5P RF

focuses on other countries within the EU “Eastern Partnership” region, for the moment Armenia,

Georgia and Moldova have joined E5P RF. A consultant study commissioned by E5P - “Expansion

Study of E5P to other Eastern Partnership Countries” - concluded that an interesting pipeline of

potential projects existed in Georgia, Moldova and Armenia in the areas of district heating, water

supply and sewage, street lighting, public buildings, public transport. The study estimates the

investment volume at some 150 million euro and requiring some 40 million euro of E5P RF grants.

The E5P RF is managed by EBRD and applies the same procedures as the E5P. It is a multi-donor

fund, which includes the recipient countries as nominal contributors, thereby enabling their

participation in the Steering Group and Assembly of Contributors, and has five international

development banks (IFIs) as implementing agencies - EBRD, EIB, IBRD3, NEFCO and NIB.

In order to increase energy efficiency E5P RF will address market failures, support an enabling

environment for energy efficiency investments, support the introduction of metering and control

systems as well as consumption-based billing, support replacement of energy intensive assets, and

provide technical assistance to improve the regulatory and enforcement capacity of public sector

bodies. Providing grant support will allow utilities to meet high energy or environmental standards

while respecting affordability constraints related to tariffs.

The IFIs develop public sector energy and environmental projects for loan-financing and apply to E5P

RF to grant-finance project components leading to increased EE and/or RE. The IFI must document

that the value of the achieved CO2-savings over a project life of 10 years priced at a price of EUR 15-

3 The IBRD is a fifth socalled Implementing Partner. But in practice, World Bank rules for the management of grant funds which insist on a 5% administration fee is blocking access to E5P grants. The other four European based IFIs have waivered the right to an administration fee; the World Bank, operating worldwide, cannot make a regional exception.

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30/tonne of CO2 is higher than the value of the grant. The minimum leverage ratio of grant to IFI

loan is 1:1; the preferred one is 1:2 for district heating projects and 1:3 or higher for other projects.

EBRD manages the E5P RF secretariat, which forwards applications received from the IFIs to the

Assembly of Contributors for approval and takes care of fund flows and reporting. The project

investments are tendered by the project owners under supervision by the implementing IFIs.

Outcome indicators for the development engagements

Thematic

Programme

Renewable Energy and Energy Efficiency Programme (REEEP) 2014-2017

Thematic

Programme

Objective

Improved energy efficiency and increased penetration of renewable energy reduces the cost of energy in the private, household and public sectors, greenhouse gases emissions and energy imports, as well as the cost of public subsidies to combat energy poverty.

Impact Indicator Energy consumption per chosen unit of measurement, share of RE in energy supply, GHG emissions compared to baselines, energy subsidies in % of GDP

Engagement Title Ukraine-Denmark Energy Centre

Outcome indicator Reliable data on energy consumption and supply and insights from simulations of complex system interactions enable the formulation of well-founded policies and result-focused action plans

Baseline Year 2014 General recognition amongst the energy administration about the lack of adequate data for a proper formulation of energy policies and of insufficient energy planning and simulation software, inter alia, for assessing issues related to long term energy security and increased penetration of renewable energy (RE) in the power system

Target Year 2017 Reliable data on energy consumption and supply and insights from simulations about complex system interactions enable the formulation of well-founded policies and result-focused action plans, with progress towards the achievement of quantitative targets being monitored by well-functioning data collection systems

Engagement Title Neighbourhood Energy Facility (NEF)

Outcome indicator Increased energy productivity and induced lower costs of private companies as well as expanded green economy sector in Neighbourhood countries, as a result of investments undertaken by companies in which IFU through its managed funds is or has been an investor in or is considering investing in.

Baseline Year 2014 Many companies in Neighbourhood countries including many with co-financing from IFU have substantial unrealised economic and energy saving potential. Private entrepreneurs with “green company/project” ideas need finance partners to develop these into bankable projects.

Target Year 2017 Private companies have invested in EE and achieved quantifiable reductions in their annual energy consumption and investments are made in green technology/service companies or RE projects, as a result of investments undertaken by companies in which IFU through its managed funds is or has been an investor in or is considering investing in. A soft target for the mobilisation of investments by NEF is in total DKK 60 million of EE and RE investments for all sources of funds.

Engagement Title Eastern Europe Energy Efficiency and Environment Partnership Regional Fund (E5P RF)

Outcome indicator Energy and environmental projects implemented in Armenia, Georgia and Moldova, resulting in significant energy savings, reduction of carbon dioxide (CO2) and other greenhouse gases (GHG) emissions.

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Baseline Year 2014 Degraded and energy inefficient district heating, water supply and sanitation systems, and solid waste management, high energy consumption in public and residential buildings, energy inefficient public lighting and public transport systems in Armenia, Georgia and Moldova

Target Year 2017 Sustainable economic and environmental use of energy resources achieved as a result of projects addressing market failures, supporting an enabling environment for energy efficiency investments, supporting metering and control systems as well as consumption-based billing, supporting replacement of energy intensive assets, improving the regulatory and enforcement capacity of public sector bodies and allowing utilities to meet high energy or environmental standards while respecting affordability constraints.

Monitoring mechanisms

Monitoring of the overall programme progress will be done by the MoFA (EUN) particularly through:

Semi-annual steering Committee meetings for the UDEC.

Semi-annual meetings of the IFU/MoFA Coordination Committee to be held with participation

from EUN, allowing for discussion of issues related to NEF (monitoring, results reporting, anti-

corruption issues, and budget allocations) as part of a wider discussion of issues related to

cooperation between the MoFA and IFU and other joint engagements.

For E5P RF primarily through participation in the annual E5P/E5P RF Assembly of Contributors

meeting.

A mid-term-review in early 2016 will take stock of progress in implementation of the engagements

related to UDEC and NEF and provide recommendations as to the use of unallocated funds

depending on results achieved in each of the two engagements. The review will also look into defining

an exit strategy for UDEC in close cooperation with Ukrainian authorities.

Budget at outcome level (DKK)

Renewable Energy and Energy Efficiency

Programme 2014-2017 (REEEP)

2014 2015 2016 2017 Total

Engagement 1: Ukraine-Denmark Energy Centre 1.5 5.0 5.5 3.0 15.0

Engagement 2: Neighbourhood Energy Facility 0.5 3.0 7.0 4.5 15.0

Engagement 3: E5P RF 9.5 0 0 0 9.5

Mid-term review 0 0 0.5 0 0.5

Total 40.0

Summary of risk analysis and risk responses

The contextual risks are significant for the attainment of the two investment focused engagements –

NEF and E5P RF. Internal and external clashes will deter private investments; while the weak public

budgets of Armenia, Georgia, and Moldova pose a challenge for the financing of public sector

investments. One risk management response is the even split of the budget allocated to E5P RF

between the three countries; the other is the small initial budget for the 2014-17 period. If the

disbursement and implementation experience of E5P RF turns out positively, the budget can be

expanded in a follow-up period. Corruption is a risk in all countries. NEF’s private sector projects face

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the risk of public sector corruption when acquiring required regulatory approvals for investments. For

UDEC the risk is negligent because the payments are for Danish inputs mainly. The IFIs of E5P-RF

have their due diligence procedures and procurement rules aiming at minimizing deviation of funds.

The major programmatic risks concern (i) the achievable scale of private investments resulting from NEF

since they are demand driven, depending on the preferences of involved investors; (ii) difficulties to

secure sovereign guarantees or municipal guarantees for IFI project loans can led to delays in the

implementation of public sector projects which seek support from E5P RF.

Institutional risks are faced mainly by UDEC: The risks concern: (i) the actual ability of the UDEC to

establish and manage cross-ministerial collaboration with other ministries and agencies; (ii) the risk of

loss of highly qualified staff in collaborating ministries and agencies due to reorganization of the public

sector; (iii) consensus on work programme and Centre activities under constantly changed political

priorities within MOECI and Ukraine in general; and iv) the actual ability of MoECI to allocate the

agreed staff inputs as required. The mitigating measure is to have the collaboration agreements

between UDEC and the external collaborating institutions in place from the start.

Overview of management set-up at programme and engagement level

The MoFA (EUN) will ensure overall management and coordination of REEEP at programme level

and promote knowledge sharing and synergy between engagements.

E5P RF’s Assembly of Contributors is the decision making body for E5P RF; it decides on the basis of

applications from the implementing IFIs whether to co-finance their projects. Day-to-day management

is performed by the joint E5P/E5P RF Secretariat at EBRD, which forwards received applications to

the Assembly and takes care of fund flows and reporting. The project investments are tendered by the

project owners under supervision by the implementing IFIs.

The Steering Committee is the decision making body for UDEC; day-to-day management is done by

the Center Director (appointed by the MoECI) on a part-time basis with assistance from the Chief

Advisor (appointed by DEA) and a Technical Coordinator (appointed by the MoECI) on a full time

basis. The Center Director in collaboration with the Chief Advisor prepares the annual work program

for the Center and associated annual budget for approval by the Steering Committee.

Day-to-day management of NEF is in the hands of IFU staff. Applicants for NEF funds are private

companies who consider undertaking a climate-related project investment in cooperation with a Danish

partner, e.g. a supplier or a co-investor. IFU’s investment committee decides on the award of an

application.

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Annex 1: Partners – brief descriptions

Engagement 1: Ukraine-Denmark Energy Centre (UDEC)

The Ministry of Energy and Coal Industry is responsible for most energy supply policies and for co-

ordinating energy policy across government and providing advice to Parliament.

The State Environmental Investment Agency of Ukraine, under the Ministry of Ecology and Natural

Resources, has the overall responsibility for implementation of the provisions of the Kyoto Protocol and

the UNFCC Convention.

The State Agency on Energy Efficiency and Energy Saving, under the Ministry of Economy and

Trade Development, has the role of advancing energy efficiency and promoting the deployment of

renewable energy sources. It has drafted the draft National Energy Efficiency Action Plan till 2020 and

the draft National Renewable Energy Action Plan till 2020.

Engagement 2: Neighbourhood Energy Facility (NEF)

IFU, the Investment Fund for Developing Countries, is a financial institution established by the

Danish Government in 1967 as a self-governing Fund. IFU can co-finance projects in developing

countries with a per capita income below USD 6,138 (in 2012). IFU provides advisory services

combined with investments in the form of share capital participation, loans and guarantees on

commercial terms for investments in manufacturing or service companies. IFU can normally co-finance

up to 30% of the total project investment including working capital. For small projects the financing

from IFU may go up to 50% of the total investment.

IFU is also fund manager of the Investment Fund for Central and Eastern Europe (IFCEE) and of the Danish

Climate Investment Fund (DCIF) set up in 2013. By January 2014, the capital reached DKK 1.3 billion

thanks to an IFU investment of DKK 250 million and DKK 775 million from PensionDanmark, PKA,

Pædagogernes Pensionskasse, Dansk Vækstkapital and Aage V. Jensens Fonde.

Engagement 3: Eastern Europe Energy Efficiency and Environment Partnership Regional

Fund (E5P RF)

EBRD, the European Bank for Reconstruction and Development, is a multilateral development bank

located in London. It is fund manager and implementing agency for the E5P RF.

The other implementing agencies for E5P RF are:

EIB, the European Investment Bank, is the European Union's nonprofit long-term lending

institution established in 1958 under the Treaty of Rome.

NIB, the Nordic Investment Bank, is an international financial institution founded in the mid-

1970s by the five Nordic countries: Denmark, Finland, Iceland, Norway and Sweden. In 2005,

Estonia, Latvia and Lithuania became members of the Bank.

NEFCO, the Nordic Environment Finance Corporation is an international finance institution

established in 1990 by the five Nordic countries: Denmark, Finland, Iceland, Norway and

Sweden. NEFCO has financed a wide range of environmental projects in Central and Eastern

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European countries, including Russia, Belarus and Ukraine. From its headquarters in Helsinki

NEFCO's activities are focused on projects that achieve cost-effective environmental benefits

across the region.

The IBRD, the International Bank for Reconstruction and Development, is an international

financial institution which offers loans to middle-income developing countries; it is part of the

World Bank Group.

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Annex 2: Results framework at output level

Thematic Programme Renewable Energy and Energy Efficiency Programme (REEEP) 2014-2017

Thematic Programme Objective

Improved energy efficiency and increased penetration of renewable energy reduces the cost of energy in the private, household and public sectors, greenhouse gases emissions and energy imports, as well as the cost of public subsidies to combat energy poverty.

Impact Indicator Energy consumption per chosen unit of measurement, share of RE in energy supply, GHG emissions compared to baselines, energy subsidies in % of GDP

Engagement Title Ukraine-Denmark Energy Centre

Outcome indicator Reliable data on energy consumption and supply and insights from simulations of complex

system interactions enable the formulation of well-founded policies and result-focused action plans

Baseline Year 2014 RE policy decisions taken and instruments adopted without reference to coherent scenario analysis and linked system analysis tools to assist in identifying least cost options

Target Year 2017 Reliable data on energy consumption and supply and insights from simulations about complex system interactions enable the formulation of well-founded policies and result-focused action plans, with progress towards the achievement of quantitative targets being monitored by well-functioning data collection systems

Output indicator Methodology for national energy balance

Baseline Year 2014 National Energy Balance based on weak data; absence of data collection system for efficient monitoring of national energy balance

Target Year 2017 Methodology available for systematic collection and interpretation of data for establishing national energy balance

Output indicator Methodology for greenhouse gases registry and UNFCCC reporting

Baseline Year 2014 Inability to comply with UNFCCC reporting obligations on national greenhouse gases emissions due to ineffective national registry system

Target Year 2017 Methodology available for establishing and updating effective national greenhouse gases registry and UNFCCC reporting system

Output indicator Methodology for monitoring energy efficiency at industrial sub-sector level

Baseline Year 2014 Absence of micro-level data for monitoring progress in the energy efficiency in industry

Target Year 2017 Methodology available for the systematic collection of data for monitoring the evolution in the efficiency of energy consumption at industrial sub-sector level

Output indicator Methodology and tools for analysis of integration of RE-power in regional grids

Baseline Year 2014 Difficulties with the efficient integration of intermittent power supply in regional grids with high concentration of wind farms and solar PV-plants

Target Year 2017 System analysis software tools for analysing the integration of intermittent RE-power in the regional grids of Ukraine identified, acquired and adapted

Output indicator Methodology and software for energy system scenario analysis

Baseline Year 2014 Difficulties with the modelling of policy options for energy planning

Target Year 2017 Methodology and software for energy system scenario analysis identified, acquired and adapted

Output indicator Analysis of options for increased use of RE in heating sector

Baseline Year 2014 District heating systems in Ukraine using natural gas as almost the only fuel source while there is potential for using biomass, biogas and municipal waste for heat generation

Target Year 2017 Analysis of options for increased use of RE in district heating

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Engagement Title Neighbourhood Energy Facility (NEF)

Outcome indicator Increased energy productivity and induced lower costs of private companies as well as

expanded green economy sector in Neighbourhood countries, as a result of investments

undertaken by companies in which IFU through its managed funds is or has been an investor

in or is considering investing in. Baseline Year 2014 Many companies in Neighbourhood countries including many with co-financing

from IFU have substantial unrealised economic and energy saving potential. Private entrepreneurs with “green company/project” ideas need finance partners to develop these into bankable projects.

Target Year 2017 Private companies have invested in EE and achieved quantifiable reductions in their annual energy consumption and investments are made in green technology/service companies or RE projects, as a result of investments undertaken by companies in which IFU through its managed funds is or has been an investor in or considered investing in. A soft target for the mobilisation of investments by NEF is in total DKK 60 million of EE and RE investments for all sources of funds.

Output indicator Greening of non-climate related projects

Baseline Year 2014 Many of the 60 companies in Neighbourhood countries in which IFU/IFCEE

have invested have not had an energy audit undertaken

Target Year 2017 6 companies had an energy audit performed

Output indicator Development of climate-related projects

Baseline Year 2014 Entrepreneurs with ideas for investments in climate-related projects e.g. RE-

power plants, RE&EE technology manufacturing, RE&EE service companies,

ESCOs, are looking for partners to assist in turning these into “bankable

projects”.

Target Year 2017 9 (pre-)feasibility studies for climate-related projects

Output indicator Awareness about NEF in the private sector and promotion of new project concepts

Baseline Year 2014 NEF, as a new grant facility, is unknown to private investor community in

Neighbourhood countries and in Denmark. New project concepts with

promising potential are still little known in the region.

Target Year 2017 NEF awareness material produced and promoted.

2-3 new project concepts promoting Danish green technology in the region

developed inter alia through studies or new concepts tested in pilot projects.

Engagement Title Eastern Europe Energy Efficiency and Environment Partnership Regional Fund (E5P RF)

Outcome indicator Energy and environmental projects implemented in Armenia, Georgia and Moldova, resulting

in significant energy savings, reduction of carbon dioxide (CO2) and other greenhouse gases (GHG) emissions

Baseline Year 2014 Degraded and energy inefficient district heating, water supply and sanitation

systems, and solid waste management, high energy consumption in public and

residential buildings, energy inefficient public lighting and public transport

systems in Armenia, Georgia and Moldova

Target Year 2017 Sustainable economic and environmental use of energy resources achieved as a

result of projects addressing market failures, supporting an enabling environment

for energy efficiency investments, supporting metering and control systems as

well as consumption-based billing, supporting replacement of energy intensive

assets, improving the regulatory and enforcement capacity of public sector bodies

and allowing utilities to meet high energy or environmental standards while

respecting affordability constraints.

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Output indicator Armenia – economically viable energy and environmental projects identified, supported, and

implemented

Baseline Year 2014 A pipeline of potential energy and environmental projects leading to energy

savings and/or reduced carbon emissions exist in Armenia

Target Year 2017 Output measured in terms of:

Total generated investment volume disaggregated into E5P RF finance

and leveraged Implementing Agency-finance and local finance

Installed renewable energy capacity (MW), total annual energy savings in

GWh, tons of GHG emissions reduced or avoided and cost of

development finance (grant funds + IFI-loans) per ton avoided GHG

emissions

Percentage reduction in annual cost of energy in EE-projects; reforms undertaken such as billing reforms and cost recovery; local job creation and consumer awareness and behavioural change.

Output indicator Georgia – economically viable energy and environmental projects identified, supported, and

implemented

Baseline Year 2014 A pipeline of potential energy and environmental projects leading to energy

savings and/or reduced carbon emissions exist in Georgia

Target Year 2017 Output measured in terms of:

Total generated investment volume disaggregated into E5P RF finance

and leveraged Implementing Agency-finance and local finance

Installed renewable energy capacity (MW), total annual energy savings in

GWh, tons of GHG emissions reduced or avoided and cost of

development finance (grant funds + IFI-loans) per ton avoided GHG

emissions

Percentage reduction in annual cost of energy in EE-projects; reforms undertaken such as billing reforms and cost recovery; local job creation and consumer awareness and behavioural change.

Output indicator Moldova – economically viable energy and environmental projects identified, supported, and implemented

Baseline Year 2014 A pipeline of potential energy and environmental projects leading to energy

savings and/or reduced carbon emissions exist in Moldova

Target Year 2017 Output measured in terms of:

Total generated investment volume disaggregated into E5P RF finance

and leveraged Implementing Agency-finance and local finance

Installed renewable energy capacity (MW), total annual energy savings in

GWh, tons of GHG emissions reduced or avoided and cost of

development finance (grant funds + IFI-loans) per ton avoided GHG

emissions

Percentage reduction in annual cost of energy in EE-projects; reforms undertaken such as billing reforms and cost recovery; local job creation and consumer awareness and behavioural change.

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Annex 3: Budget at output level - DKK million Thematic Programme: Renewable Energy and Energy

Efficiency Programme (REEEP) 2014-2017

2014

2015

2016

2017

Total

Engagement 1: Ukraine-Denmark Energy Center

Output 1.1: Methodology for national energy balance 0.3 1.2 1.2 0.3 3.0

Output 1.2: Methodology for greenhouse gases registry and

UNFCCC reporting system. 0.3 1.0 1.1 0.3 2.7

Output 1.3. Methodology for monitoring energy efficiency at

industrial sub-sector level 0.3 1.4 1.4 0.3 3.4

Output 1.4. Methodology and tools for analysis of integration of

RE-power in regional grids 0.2 0.4 0.6 0.7 1.9

Output 1.5. Methodology and software for energy system scenario

analysis 0.2 0.4 0.6 0.8 2.0

Output 1.6. Analysis of options for increased use of RE in heating

sector 0.2 0.6 0.6 0.6 2.0

Subtotal Development engagement 1. 1.5 5.0 5.5 3.0 15.0

Engagement 2: Neighbourhood Energy Facility

Output 2.1. Greening of non-climate related IFCEE & IFU

projects

0 1.0 1.0 1.0 3.0

Output 2.2. Development of new climate-related projects 2.0 2.0 3.0 7.0

Output 2.3. Promotion and development of awareness about

NEF

0.5 0 0 0.5 1.0

Unallocated / budget reserve* 0 0 4.0 .0 4.0

Sub-total Development engagement 2 0.5 3.0 7.0 4.5 15.0

Eastern Europe Energy Efficiency and Environment Partnership Regional Fund

Output 3.1. Armenia - economically viable energy and

environmental projects identified. supported. and implemented

Upgraded and modernized district heating systems

3.0 0 0 0 3

Output 3.2. Georgia - economically viable energy and

environmental projects identified. supported. and implemented

Upgraded and modernized district heating systems

3.25 0 0 0 3.25

Output 3.3. Moldova - economically viable energy and

environmental projects identified. supported. and implemented

Upgraded and modernized district heating systems Upgraded

public lighting and transport systems

3.25 0 0 0 3.25

Sub-total Development engagement 3** 9.5 0 0 0 9.5

Sub-total Thematic Programme 39.5

Mid-term Review 0 0 0.5 0 0.5

Grand total 40.0

Note: * The use of the unallocated budget reserve will be decided after the mid-term review in early 2016. The amount is

thus not distributed between years but placed in 2016.

** The allocation for E5P RF will be disbursed in one installment late 2014 to allow Denmark to obtain the right to

participate in meetings of the Assembly of Contributors for each of the three country windows from the outset of the work

of the E5P RF.

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Annex 4: Risk Management Framework

See full Risk matrix in Annex 4.a. (attached)

Risk summary for grant proposal

Risk factor Likelihood Impact Risk response Combined residual risk

Contextual Risks

Security & Safety: Ukraine-Russia tensions in Crimea and in East-Ukraine; Georgia-Russia tensions in South-Ossetia; Armenia-Azerbaijan tensions in Nagorno-Karabakh risk deterring private investments and challenge financing of public sector investments

Likely Major EU as intermediator Major

Programmatic Risk

Difficulties to secure sovereign guarantees or municipal guarantees for IFI project loans lead to delays in the implementation of public sector projects which seek support from E5P.

Likely Major The budget allocated to E5P-RF is split evenly between the three countries; the initial budget for the 2014-17 period is small.

Minor

Institutional Risk

The ability of the UDEC to establish and manage cross-ministerial collaboration with other ministries and agencies; the risk of loss of highly qualified staff in collaborating ministries and agencies due to reorganization of the public sector; consensus on work programme and Centre activities under constantly changed political priorities within MoECI and Ukraine in general; and the actual ability of MoECI to allocate the agreed staff inputs as required.

Likely Major The mitigating measure is to have the collaboration agreements between UDEC and the external collaborating institutions in place from the start and to give the Steering Committee flexibility to adapt to institutional changes. Current Ukrainian administration is very committed to finding solutions to the energy crisis.

Major

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Annex 5: Summary of Appraisal Recommendations

Excerpt from Danida Aid Management Guidelines standard template and amended as relevant4: The final appraisal report must include this table summarising the recommendations regarding the further preparation of the programme. Only major recommendations of the appraisal report requiring action from the Department must be specified in the left column below, and the table must be signed by the team leader/TAS representative and received by the Department no later than 14 days after the end of the appraisal process. “N.a.” is indicated in case there are no recommendations regarding the issue concerned. The right column is filled in by the Department (EUN), when the final thematic programme document and development engagement documentation have been prepared, and the table must be forwarded to the Under-Secretary for Global Development and Cooperation and TAS as soon as possible, and no later than five weeks before the planned presentation of the Programme to the External Grant Committee of Danida.

Title of Programme Renewable Energy and Energy Efficiency Programme 2014-2017

File number UM-ARK 403.Ukraine.1-18.

File Number F2 2014 - 6458

Appraisal Report date 04 July 2014

Grant Committee meeting date 09 September 2014

Summary of possible recommendations not followed (to be filled in by the Department)

Overall conclusion of the appraisal This programme has a high political priority for Denmark, as clearly reflected in the strong attention at the highest political levels and in the media. Ukraine and other countries targeted for support are struggling to modernise their energy sectors in efforts to reduce energy dependence of Russia. Programme formulation has taken place in a context of political instability, particularly in Ukraine where the situation has been volatile for several months, as evidenced in connection with the Presidential Election on 25 May, the Russian decision to close gas supply to Ukraine on 16 June, and the signing on 27 June by Ukraine, Moldova and Georgia of Association Agreements with the European Union. The Appraisal finds that the programme reflects the general thrust toward greater policy coherence, since while rooted in development policy, the programme also strongly support Danish foreign and security policy, and the potential for export promotion the use of key Danish know-how and technology. The Appraisal finds the programme structure to be complex, yet endorses the proposal to support the three rather different engagements so as to achieve goals i) at the strategic level concerning more effective and well-informed energy sector planning and governance in Ukraine; ii) facilitating increased private sector energy productivity thus expanding green economy investments in several countries in the Region; iii) assisting the improvements of

4 The term”mission” is here replaced by ”Department” (EUN).

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energy efficiency and greening of urban infrastructure and services in Armenia, Moldova and Georgia. The Appraisal concludes that the programme is in line with the Strategy for Denmark’s development cooperation and the Strategy for the Danish Neighbourhood programme, as well as the relevant Danida strategies and guidelines. With regard to the proposed Ukraine-Denmark Energy Centre, the Appraisal found that the Ukraine Implementing Partner could not yet make very firm commitments on specific staffing inputs and concrete physical local of the Centre, and these issues need to be negotiated at the appropriately high level. The appraisal is positive and it is recommended that the proposed funding be approved, with due attention paid to the appraisal recommendations.

Recommendations by the appraisal team Follow up by the Department Country programme Level:

1. Justification and rationale of the country programme, preparation process and strategic linkages between country programme vis-à-vis the country policy document.

1.1 N/A 1.1 Thematic Programme Level:

2. Consideration of relevant Danida strategies.

2.1 2.1

Proposed thematic programme support design including rationale, effectiveness, efficiency, impact and sustainability and partner choices.

3.1. 3.1.

4. Adherence to the aid effectiveness agenda

4.1. EUN should make best possible use of the Eastern Europe Energy Efficiency and Environment Partnership (E5P) Annual Assembly for discussion of strategic issues and concrete project proposals. In general more emphasis should be given in the programme documentation to issues of synergy with other development partners and donor coordination, which is highly ineffective in Ukraine.

4.1. EUN will continue to use the E5P Annual Assembly of Contributors as a forum to raise strategic issues, including issues related to energy policy in Ukraine, and encourage Ukraine to share knowledge products from the Ukraine-Denmark Energy Centre with contributors as relevant. Denmark participated in the high-level meeting in Brussels on July 8 on donor coordination in Ukraine. It has been stressed in the engagement document for the Ukraine-Denmark energy Center that participation in relevant coordination fora should be included in the work programme to keep the Centre abreast of other technical assistance projects. One of the potential anchors for the Centre within MoECI is the International Relations Department which is in charge of monitoring international technical aid.

5. Budget

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5.1 Within the limitations of applicable Danida guidelines a budget line for un-allocated funds is recommended in the allocation to the Investment Fund for Developing Countries (IFU) for the proposed Neighbourhood Energy Facility (NEF). Considering the demand driven nature of this engagement some flexibility should be incorporated and the possibility of a reallocation between engagements should be kept open. Reallocation of such unallocated funds could be decided on based on the Mid-term Review in early 2016 of the Ukraine-Denmark Energy Centre engagement, since more resources could be needed here.

5.1 In line with the recommendation a budget line for unallocated funds of 4 mio. DKK has been included in the budget for NEF. The proposed mid-term review and the possible reallocation of unallocated funds have been mentioned in the engagement documents for both NEF and the Ukraine-Denmark Energy Center.

6. Identified risks and risk management

6.1 N/A 6.1

7. Follow-up to the recommendations of the Danida Programme Committee

7.1 EUN’s comments on key Programme Committee (PC) recommendations have not as such been received by the Appraisal, but the programme documentation reflect follow-up on most points. However particularly with regard to PC recommendations concerning knowledge sharing among stakeholders and internal coherence and synergy EUN should comment and the final programme documentation should be adjusted accordingly.

7.1 Synergy with other interventions in the country Progress reports from NEF will be discussed during regular meetings of the IFU/MFA Coordination Committee thus allowing for a holistic view of NEF and other MFA support to IFU and ensure knowledge sharing among stakeholders within MFA and IFU. EUN will also encourage IFU to promote NEF as well as other IFU instruments intensively in the Neighbourhood Region. The “peer-to-peer twinning” between the Danish Energy Agency (DEA) and the Ukrainian Ministry of Energy and Coal Industry will be one out of several new twinning arrangements between Danish authorities and authorities (myndighedssamarbejde) in other countries aiming at stimulating growth abroad and in Denmark in a mutually beneficiary manner. These twinning arrangements are intended to provide technical expertise and advice based on a direct exchange of experience between government institutions as cooperation

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among peers. By providing improved framework conditions for energy planning and investments in energy efficiency and renewable energy sources the Energy Center will also improve market conditions for Danish companies working in this sector and function like a showcase for Danish know how. Denmark supports a number of bilateral and multilateral initiatives related to energy efficiency and green growth such as the World Bank’s Energy Sector Management Assistance Program (ESMAP), UNEP Danish Technical University Partnership (formerly UNEP Risø Center), as well as the E5P Fund supporting Ukraine. Whenever relevant EUN will encourage knowledge sharing between the Programme and these initiatives. ESMAP is involved in a number of studies in Ukraine and the World Bank is one of the IFI’s involved in E5P. ESMAP’s analytical work is relevant to the E5P. As member of the EU and the Energy community Treaty Denmark has already adhered to the obligations and standards in terms of energy efficiency and climate policy that the Neighbourhood countries are striving to attain and is thus well placed to provide advice. EUN will facilitate information sharing and knowledge exchange between IFU – DEA – E5P stakeholders in Ukraine throughout the relevant fora of the programme.

8. Other recommendations

8.1. The stated programme period should be clearly defined in the documents (a start in late 2014 and completion by end calendar 2017, meaning a 36+ month implementation) - and process action plans should be developed for each of the three Engagements. For the Ukraine-Denmark Energy Centre, considerations of exit strategy should be

8.1. The programme period has been clearly stated in the documents. Process actions plans have been developed for each Engagement. For the Ukraine-Denmark Energy Centre, considerations of an exit strategy will be included in the Mid-Term Review planned for early 2016 in order to ensure that the

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reflected. remaining period will be guided by an exit strategy, ensuring responsible phasing out.

9. Engagement Level

9. Capacity of partners

9.1. The proposed choice of partners for the Ukraine-Denmark Energy Centre is right, but in the light of expected changes in the institutional structure in Ukraine, sufficient flexibility needs to be built into the Engagement and its Inception Phase to cope with foreseen institutional chances potentially affecting at least two of the outputs. A soft start-up from early 2015 on the output related to energy planning and scenario analysis should be planned and renewable energy issues in district heating should be incorporated in relevant output indicators.

9.1. In case of institutional changes and new distribution of roles and responsibilities among Ukrainian institutions the Steering Committee for the Ukraine-Denmark Energy Centre must decide on implications for the work programme and institutional aspects related to its implementation. At its first meeting right after the inception phase the Steering Committee will decide on the content, scope and timing of each of the outputs and approve the work programme of the Centre. It has been stipulated in the engagement document that the feasibility of a “soft” start-up of output 5 in parallel with outputs 1, 2, and 3 should be analysed during the inception phase. Analysis of increased use of renewable energy in district heating has been added as a separate output due to its relevance to long term energy security. The content, scope and timing of work on this output will be analysed during the inception phase.

9.2. Since the Ministry of Energy and Coal Industry of Ukraine (MOECI) could not make a firm commitment to the Appraisal on specific staffing inputs and office space within it main building the Embassy of Denmark in Kiev should be requested to urgently negotiate with this Ministry to confirm its necessary inputs as Implementing partner for the Ukraine–Denmark Energy Centre and twinning with the Danish Energy Agency (DEA).

9.2. The Embassy of Denmark in Kiev has obtained a general commitment from the MoECI regarding availability of staffing inputs, funding for local costs and office space. The specific physical location of the Ukraine-Denmark Energy Centre and the anchoring of the Energy Centre within the MoECI’s organisation and staffing structure is still being discussed as the Center’s work is of relevance to the work of several MoECI departments.

10. Results Framework

10.1. The allocation to the European Bank for Reconstruction and Development for the Engagement concerning the E5P–Regional

10.1. The indicators for the engagement concerning the E5P-Regional Fund have been aligned with the set of indicators agreed

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Fund (E5P-RF) is an un-earmarked contribution to a multi-donor fund. Accordingly the very specific outcome and output indicators proposed should be better aligned with the set of indicators agreed among the E5P-RF contributors.

among the E5P-RF contributors.

10.2 The outcome and output indicators in the proposed Engagement with IFU for the NEF should be adjusted as agreed during appraisal between EUN and IFU. A safeguard should be built into the Implementing Partner Agreement with IFU indicating a minimum percentage distribution of NEF grants to projects in Ukraine, Moldova, Georgia, Armenia, Albania, Bosnia-Herzegovina, and Kosovo.

10.2 The outcome and output indicators have been adjusted as agreed between EUN and IFU. A safeguard indicating that a minimum of 70 % of NEF grants will allocated to priority countries of the Danish Neighbourhood Programme has been established.

11. Budget allocation

11.1. For the Ukraine-Denmark Energy Centre a new proposal from DEA based on a 2½ year long term advisor should be reflected in the documents. It must be ensured that at least DKK 500.000 is reserved for a Mid-term Review of the Centre engagement in early 2016 (Review managed by EUN).

11.1. A 2½ year long term advisor from DEA has been included in the engagement document and its budget to support planning and coordination of activities of the Ukraine-Denmark Energy Centre and address risks related to the changing institutional landscape in Ukraine and the risk of staff changes in collaborating ministries and agencies. Funds have been allocated for a Mid-term Review in early 2016.

12. Identified risks and risk management

12.1. The Inception Phase for the Ukraine-Denmark Energy centre should develop a work programme and the appropriate tools to ensure a demand-driven, results oriented and administratively lean approach to technical assistance delivery. DEA should as part of the twinning deliver a Chief Advisor for 2½ years of which the first two years full-time and the selection of this DEA advisor should be transparent with alternative curricula vitae proposed and the opportunity for the MOECI and other key Ukraine partners to interview the nominated candidate.

12.1. The purpose of the inception phase has been described in the engagement document as recommended. The Ukrainian Center Director will have the overall responsibility for the effective utilisation and monitoring of all technical assistance provided and the timely production of outputs and implementation of the work programme. DEA will be requested to deliver a Chief Advisor as recommended with due regard to transparency and Ukrainian ownership.

13. Monitoring and reporting arrangements

13.1. N/A 13.1.

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14. Others

14.1. EUN should in close consultation with the Danida Business Contracts team ensure that the allocation to the Investment Fund for Developing Countries complies with the EU Directive on Procurement.

14.1. EUN has ensured that the conditions/procedures related to the allocation of the task as manager of NEF to IFU complies with the EU Directive on Procurement.

I hereby confirm that the above-mentioned issues have been addressed properly as part of the appraisal and that the appraisal team has provided the recommendations stated above. Copenhagen on 04 July 2014 Jens Lorentzen Team leader/TAS representative I hereby confirm that the Department has undertaken the follow-up activities stated above. In cases where recommendations have not been accepted, reasons for this are given either in the table or in the notes enclosed. Signed in Copenhagen on the 12 August 2014 by Fin Poulsen, Chief Advisor/EUN

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Annex 6: List of supplementary material

- Development Engagement 1 Document – Ukraine Denmark Energy Centre

- Development Engagement 2 Document – Neighbourhood Energy Facility

- Development Engagement 3 Document – E5P RF, including E5P RF rules and

allocation guidelines

- Climate Change and Environmental screening note

- Human Rights Based Approach screening note

- Minutes of the meeting of Danida Programme Committee, April 24, 2014