EE-based Formalization by Ohygen Rules

Very interesting! Has this work been posted anywhere else in more depth that you might include a link for? And has there been any evolution in your thinking or updates you might want to add? And on another note, do you have suggestions for how the template might be better formatted so that your proposal could fit into it? -Erik

Erik, much later than i had hoped, but we have some results from our prototype and they are more than exciting!! i'll copy paste the blog post (http://www.undp.org.me/home/2013/mili/index.html) here: Innovation means never having to look for new ideas in your field: 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 proposal is a testament to the title of the blog (which is a quote by Jack Hughes of TopCoder). 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 100m2 house, a €5000 investment in energy efficiency measures creates €830 savings on the energy bill per year (or 63%) with energy savings of 37.900 KWh. The payback period at current energy prices is 6.12 years. An important note: energy prices in Montenegro are almost ½ 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 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% 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 €8 million or 2.5% 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 GWh, reducing the annual import needs by 27%. Assuming energy consumption remains constant Montenegro would become an energy exporter after less than 4 years. This idea would generate a minimum of €500 million for local governments from the legalization costs over 20 years (20 years being a payback period) or around €2 million on 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). 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!

Dear Michael, thanks so much for your comment! Enforcement mechanism is arguably a reason why we are where we are with this issue though i think this time around the government is really making sure that everyone is on the same page in terms of the rules of the game (what can be done, how it is to be done), with support to households both that have illegal homes (for a variety of reasons, some having nothing to do with the household itself) and those with legal homes but who wish to pursue energy efficiency measures. So, there is a lot of support for solving this issue from all corners, that enforcing the non compliance (enforcement mechanisms are all encapsulated in just adopted new law), shouldnt be an issue. BUt then again, we will be able to see how it works out once we scale up! thanks again Millie

Tom, at the moment we are at an impasse as the citizens have very little incentive to legalize their homes (they've got energy connection, waste disposal facilities, etc) while the price for legalization is very high (Montenegro being one of the most in-debt countries in the region, with the growing unemployment) thus very few families would venture out to get a loan (at incredibly high interest rates) to pay for legalization. However, those who do not pay in the coming period are facing some pretty drastic penalties. So with the scheme, without having to pay any extra money on the monthly basis, the household get to have a title to their home (which can serve as a collateral, for example, for a business loan), better standards of living, and the Gov't gets to have a steady revenue stream that it can reinvest in municipal infrastructure. The energy prices in the country have gone up almost 40% in the last 2-3 years, and they are still about 80% less than what the average EU citizen pays (the liberalization of the energy market will happen in the region over the next few years). So the scheme will increasingly become more profitable for the citizens. And in the northern region (relative to central and southern, features 2x higher poverty and unemployment levels), this scheme will provide legal empowerment to the poorest. Maybe to sum up, our intention wasnt to create financial savings for the households- this is merely an indirect benefit and will become more so with energy prices going up. Our primary concern were households living in illegal homes they, for number of reasons, cant/wont legalize. So our intention was to try and create some financial room through savings on energy bills that could offset legalization costs (and EE retrofit costs). Hope it makes more sense? Enough to get your vote :) Millie

Thank you. Proposal edited. Best.

Well crafted and not that hard to generalize. Well done!

E, thanks for your comments! Retrofits take anywhere from one to few weeks to complete(this depends on the extent of the works done, size of the house, etc), but it is performed without displacing families. EE retrofits are being done on scale all over the world, but we havent found (and would be grateful if we could actually get intel on some) any information about savings from energy efficiency being used as a deliberate policy option to incentivize another action (in our case offseting costs of legalization). Once a family gets a title to their home, they can use it as a collateral for example- it provides security and dignity on one, and a host of health, safety, and comfort benefits (these come from retrofitting). Thx again for your comment and support! :) Millie

Keith, thanks for your question. What we mean is that at the moment (prior to this scheme), the citizens had little incentive to legalize because they didnt have the money and they were connected to all the utilities, and the government didnt have incentive to enforce the law too stricktly for a number of reasons- they know people simply dont have the money to pay the tax, in many cases it isnt their fault that they havent gotten the necessary licences, and so on. SO our idea is to create financial savings for the households through energy efficiency retrofit of their home (so their utility bill is lower the month after retrofits are completely) and to take those savings and allocate them directly to pay for legalization and the cost of energy retrofit loan. In the end, the family doesnt pay any more money the month after retrofit but they get a title to their home and a higher level of comfort in their house. Hope that helps? Millie

Dear Sceptic (and i do love the name!) thanks for the comments! funnily enough, all points you raised we (thought about/factored in) tried to incorporate into the scheme, so ill take them one at a time: - Enforcing rules: government's position on enforcing rules is not a fixed notion but changes throughout the time (on an off change that what im saying is obvious) and it depends on a number of internal/external factors. For example, a government may be more reluctant to enforce rules on legalization if at the moment it is gearing up for elections. Conversely, it may be more prone to enforce the rules if it is battling budget shortages. So the case isnt so much that the government can not but would not enforce certain rules- this could be true of any country in transition, i would imagine. In any case, we try to incorporate this into our analysis and come up with a solution that require enforcing the rules for the most drastic offenders (those who refuse any type of a scheme) and that puts the government in position to offer to citizens a solution that considers a wealth of factors (for example, in some cases, i could live in an illegal house through no fault of my own- the municipality may not have financial resources or technical know how to complete the urban documentation that would result, among others, into a use permit for my house). - human nature: our assumption was that any scheme that would cost additional euros to families would be a no go, as a result of a number of factors: overall development levels, poverty/income levels, in-debt levels of the population, etc etc. if even faced with the type of a scheme that would offer such deal citizens dont sign up, it would also put government in an easier position to crack down on offenders (irrespective of the cause of illegal nature of the house). Lastly, while there sure are homeowner-squatters among the population, the majority of citizens we have come across in our research actually view the illegal nature of their household as an incredible burden and given the adequate scheme, would welcome a way out of it. - enforcement of the scheme: there are several factors that are taking place at the moment that will make enforcement of a number of rules easier, for example introduction of smart energy meters that can enable energy companies to turn off energy access without having to go out in the field. to be completely honest, this is probably the weakest part of the scheme not because of its logic but because we simply havent had a chance to test it out in the field comprehensively yet... and it is one part of the scheme that will most likely require testing several models out and seeing which one works best under any given set of circumstances. Hope this answered some of the issues you've raise, and definitely earned us a Sceptic's vote :) Millie