Hungarian Streets Hunger for Capital
Hungarian Streets Hunger for Capital
Lack of capital is the greatest barrier to the introduction of efficient lighting technologies in Hungary, not a shortage of technologies or lack of knowledge, argues guest author Ian Brown.
Energy intensity in Hungary is above the levels of Western Europe. In the past, electricity was (by Western standards) very cheap-whether it was subsidized is a subject of some debate, depending on the definition of subsidy. However, tariffs have risen substantially in real terms in recent years in the industrial sector, although to a lesser extent in the more politically sensitive domestic sector. Street-lighting tariff levels are between those of industrial and domestic tariffs.
Lighting accounts for ~6% of the total electrical consumption in Hungary. By contrast, street- lighting alone makes up a very considerable proportion (~25%) of the total electricity use by municipalities.
Three years ago I talked to both Ministry and municipal officials and examined data to assess the potential for improvements in energy-efficient lighting. There was, and still remains, a considerable potential for improving the efficiency of public lighting. In streetlighting, high-pressure sodium lamps are widely used in Budapest, although in other cities and towns mercury vapor lamps still predominate. In small villages (and in many towns) incandescents are still used. Then, as now, accurate data on the use of lighting technologies do not exist, but anecdotal evidence and first-hand experience support the view that there is a considerable potential for energy-efficiency improvements in streetlighting in Hungary.
THIRD-PARTY FINANCING
While the exact potential for lighting efficiency improvements in Hungary has not been determined, it is undoubtedly large. However, the most significant barrier to efficiency improvements is not the availability of technology. There is no shortage of energy-efficient lighting technologies in Hungary. Tungsram (now owned by GE) manufactures a wide range of energy-efficient lamps, including CFLs, in Hungary. Moreover, Philips, Osram, and Siemens lamps are widely available and actively promoted.
Nor is the greatest problem the lack of knowledge of the technology, although improvements could certainly be made in this area. To help spread awareness of energy-efficient technologies (including lighting), the Hungary-EC Energy Centre organized a series of seminars for municipalities throughout Hungary in June 1993. Later this year the Centre will publish a technical manual on energy-efficient lighting technologies which will be distributed to all municipalities in Hungary.
However, the greatest barrier to the introduction of energy-efficient lighting technologies, was, and still is, the lack of capital. For this reason "third party financing", in which an outside energy service company (ESCO) packages together the design, installation, and financing, with the project costs (and the ESCO's profit) being paid from the savings achieved, is very appealing in Hungary. Could this approach be used to accelerate efficiency improvements in Hungary?
ESCOs BECOMING ACTIVE
Three years ago only one company-Credilux-was actively working as an energy service company in Hungary. Credilux was founded in late 1989 by five Hungarian partners as a joint venture, specifically to undertake third party financing for lighting investments, initially in streetlighting. The five partners in Credilux are (i) GE/Tungsram, a lamp manufacturer (and one of the largest industrial companies in Hungary); (ii) Tungsram/Schreder, a joint-venture Tungsram/Belgian luminaire manufacturer; (iii) an electrical contractor specialized in lighting installations; (iv) a bank; and (v) the AEEF-the State Energy Inspection Authority.
The company was formed with 16 million Hungarian forints (~US$185000) in capital, which has since been increased to 24 million HUF (~$275000). The company had, and still has, only two full-time employees, doing administration only. The partners share the responsibility for marketing, design, supply, and installation. The objective of the manufacturers and installers in forming Credilux was not to maximize profits, but rather to safeguard their markets in the area of streetlighting, which the current economic difficulties have severely eroded, owing to the municipalities' lack of investment funds.
Up to the end of 1991, twenty contracts had been signed, with 24 million HUF invested-i.e. the entire capital of the company. All of these first contracts were for municipal street lighting improvements, except for one municipal ice-skating rink. Since then (up to August 1993), 10 more contracts have been signed, representing investments of 35 million HUF in 1992 and 23 million HUF to-date in 1993. In 1992, 20 million was revenue and capital, and 15 million was bank loans. This year, all projects have been financed by the company's revenue. The projects are definitely regarded as profitable, and the payback time can be as short as 2.5 years.
Three years ago no foreign energy service companies were active in Hungary. Since then, some US ESCOs have expressed interest in the Hungarian market (including a request from a US ESCO to retrofit the Tungsram factory). However, this has yet to result in concrete projects.
There are around 3000 municipalities in Hungary, ranging in size from Budapest (population 2.5 million) to the smallest village. In evaluating the potential market, the partners involved in Credilux estimated that there are between 500 and 1000 streetlighting efficiency improvement projects that could be cost-effectively financed through third-party financing.
CAPITAL IS THE CRUCIAL FACTOR
Although the projects that have been undertaken so far are an encouraging indication of the existing potential, they have only scratched the surface of the potential market, as Credilux would be the first to admit. I argued in the past, and would maintain today, that the crucial factor determining the success of third-party financing in Hungary is not the technical capacity of Hungarian or foreign ESCOs, or their marketing abilities, but the lack of access to low-cost capital. Domestic credit is expensive (30% plus) and difficult to find, while the multilateral lenders are still supply-side oriented and not geared up to giving such small-scale loans.
Some help has been given to such investments (including some of the projects described above) via a credit line, run by the Hungarian Credit Bank, of 10 million ECU (~$12 million), provided by the German Government. This credit line provides loans at a current interest of 13%, and the loans are heavily oversubscribed, with the largest part of the loans being made to municipalities. However, the fact that demand for this credit line exceeds supply, and the limited nature of the credit, indicates that this alone does not provide the solution.
Unless a solution to the financing problem is found, then third party financing will remain only a marginal solution to improvments in public lighting efficiency in Hungary.
Ian Brown
Ian Brown is EC Senior Advisor at the joint Hungary-EC Energy Centre.
Address:
Budapest 1087, Konyves Kalman krt 76, Hungary
Tel: +36 1 269 9067
Fax: +36 1 269 9065