(crossposted from World Bank’s PublicSphere blog)
Several months ago a colleague of mine wrote about our idea to legalize thousands of informal homes in Montenegro using energy efficiency measures (or see the infographic for a visual show off the idea).
We have been working on urban planning issues in Montenegro for almost a decade, but it was only when we had colleagues of different background looking at the problem- energy, economy, urban planning, communication, community engagement- that the solution came out. In short:
- Problem: over 100,000 illegal homes in Montenegro (if normally distributed would imply that every other household lives in an illegal home) that household don’t have an incentive or funds to legalize.
- UNDP idea: savings on energy bills would be re-invested into legalization and energy efficiency measures that created savings in the first place. Directly, we tackle informal settlements and high energy intensity in Montenegro (8.5 times higher than in the EU).
The MIT ClimateCoLab invited us to submit the idea as an innovative method for tackling climate change. My colleague Jelena Janjusevic and I were invited to present the concept at the 3rd International Symposium on Sustainable Development, local papers wrote about it and people tweeted how it sounds neat. The problem was that our idea was just that – an idea.
So we decided to get our hands dirty and turn our idea into a prototype.
We wanted to test whether energy efficiency measures can create sufficient savings on energy bills that could offset legalization and infrastructural costs. If it didn’t work, well we would have found another way how not to do it.
Bijelo Polje, a municipality in the impoverished northern region of Montenegro took a leap and partnered with us.
After posting a call for interest, 4 households were selected for testing our idea, based on a variety of socio-economic indicators- we wanted to work with the most vulnerable members in the community.
The results of the prototype are striking:
- For a 100 meter square house, a 5,000 euro investment in energy efficiency measures creates 830 euros in savings on the energy bill per year (or 63 percent) with energy savings of 37,900 killowatts.
- The payback period at current energy prices is 6.12 years. An important note: energy prices in Montenegro are almost half of average EU prices. In other words, as energy prices grow, the payback period will shrink.
- The savings were sufficient to cover both legalization and energy efficiency measures in a way that the idea was expenditure-neutral for families. In other words, a family didn’t have to cash out a single euro more the month after the reconstruction but their energy bill was lower, they had a title to their home, and better quality of life.
We were intrigued by results, so we wondered: what impact on the economy could we have if we scaled our idea up to all 100,000 homes over 10 years?
My colleague Jelena conducted the economic analysis in order for us to answer this question and before we show the results, two disclaimer points in regard to the analysis: one, this model can apply to only one type of illegal home – the one where the owner has built a house on their own land but doesn’t have the necessary permits (this is indeed the most dominant type of illegality but not the only one); and two, the macro-economic analysis is done using extremely conservative estimates that do not account for indirect results (e.g. how could we account the impact on health system and overall productivity as a result of improved living conditions?).
- Scaling up the idea would require a direct investment of around 470 million euros in the construction sector over. On annual basis, this implies 14% of the current level of construction sector in Montenegro.
- This level of investment would result in a 1.5 percent increase in GDP annually over 10 years relative to 2012 GDP levels.
- The implementation of the scheme would require some 60,000 jobs in total (existing and new), which exceeds the current employment base in Montenegro and signifies the need to import labor.
- VAT-related revenues would amount to eight million euros or 2.5 percent of the current VAT income annually over 10 years.
- The energy savings (not accounting for the rebound effect in the aftermath of energy efficiency measures) would amount to 347 gigawatts, reducing the annual import needs by 27 percent. Assuming energy consumption remains constant Montenegro would become an energy exporter after less than four years.
- This idea would generate a minimum of 500 million euros for local governments from the legalization costs over 20 years (20 years being a payback period) or around 2 million euros on a monthly basis.
So where are we now? We have a model that works and that has tangible results on many levels. There are several questions that we need to work out in order to scale the idea:
- Where will the initial investment come from? There are several possibilities, most preferred in our opinion is an ESCO company but the Government could consider taking a low interest loan or investing itself (though in the financially strained environment, this isn’t very likely to happen).
- Nudging. We don’t envisage this idea to be mandatory. A family can legalize their home by following a standard procedure of paying for the cost of legalization and obtaining the necessary documents. We see it as a form of liberal paternalism, a way to nudge people toward a solution that is a win in far more ways than one- more jobs, more savings, more energy for export. Here we borrowed from the UK Government’s Nudge unit, who found an interesting way to nudge Brits toward energy efficiency. They found that people were reluctant to retrofit their homes as this would first imply cleaning out their attacks. So the Nudge Unit designed a scheme whereby the company in charge of energy efficiency would also clean out the attic and dispose of the unwanted things- all a person would have to do it apply. In our context, it will be interesting to see how this nudge will work out and in what context as we move on to the next steps…
- What are the next steps? We would like to move from 4 to about 50 to 100 homes, preferably in a single neighbourhood. We believe that the results would stand out in a more effective way and clustered way, and we also believe that it would allow us to learn as we’re doing but still on a relatively small sample of households.
The Government of Montenegro is fully invested in the model. We have few interested private sector companies and international financial institutions, including EBRD but we are on the lookout for other partners. Get in touch if you’re interested!