A town with a population of 12,000, Gurievsk is a mere 10 kilometres away from Kaliningrad centre. The rural environment and reasonable distance to Kaliningrad have encouraged a lot of families with children and commuters to settle down in the community. 

Recently, the town of Gurievsk joined forces with NEFCO to upgrade the street lighting system. The idea of the pilot project is to replace the existing obsolete street lamps with low-energy LED lights, which is expected to reduce electricity consumption by 270,000 kWh per year. In economic terms, this means an annual saving of 1,267,000 roubles. The money will be used, among other things, to build and extend the infrastructure in new residential districts.

At the same time, the project yields an added bonus in the form of environmental benefits. Reduced energy consumption will decrease sulphur and carbon emissions by about 122 tonnes per year. On top of everything else, the municipality will be able to remove environmentally-hazardous mercury from the old lamps at the end of their service life.

Preparations for the project are already under way when we arrive in Gurievsk for a meeting with the municipal decision makers. Competitive bidding for the purchase of new lamps was already finished and the contract had been awarded to the Intecco Group, based in the Moscow region. The company has delivered the new street lights in November and is scheduled to complete the installation by the end of the year. 

“We recently assumed ownership of the street lighting from the Gurievsk District Administration. Because this part of the infrastructure eats up a lot of energy, we came soon to the conclusion that the obsolete lamps should be replaced. We were quick to pick up on NEFCO’s offer to upgrade the street lighting and cut down our energy consumption," says Yury Rudi, First Deputy Head of Gurievsk Municipality Administration.

New law on energy efficiency

In 2009, the Russian Duma passed a new law requiring all Russian municipalities to draw up action plans to improve their energy efficiency. Among other things, the law stipulates that municipalities should install technical systems that allow metering of energy consumption by municipality-owned properties. The goal established by the Russian government is to reduce electricity consumption by 40 per cent by 2020. These objectives encourage municipalities like Gurievsk to take a hard look at their energy consumption.

“An important part of our municipal energy programme relates to heat generation in the municipality. We’ll invest in an extensive modernisation of several heating plants and boilers in order to reduce the cost of municipality-owned properties," says Yury Rudi.

Aside from this, plans are in place to upgrade the municipal water supply system. Automation of the municipality-owned water pumps could control water supply, using less energy and reducing the consumption of drinking water. But Rudi underlines that the order of priority for the contemplated investments will be dictated by current cost levels. After all, it is the heating of properties that swallows the most money. Therefore the municipality’s next energy project will address heat generation.

Strong will to promote energy efficiency in the district

“We hope to be able to fund a major part of these investments with the assistance of external financiers. We're looking to secure economic support from the federal and regional authorities primarily, and secondarily apply to international financial institutions for loans," says Olga Trachkovskaya, Deputy Head of Gurievsk Municipality Administration.

Ludmila Ivochinka, Chief of the Complex Development Department at the Gurievsk District Administration, confirms that there is a strong political will to promote energy efficiency across the district because it provides the opportunity to achieve savings for the District Administration.

“We’re interested in supporting similar investments in a range of municipalities in the Gurievsk District,” says Ludmila Ivochinka.

Gurievsk expects to finance around 15 per cent of the costs of the planned projects with local tax revenues. In the instance of the NEFCO-funded project to upgrade street lighting, the municipality will take a loan of 5.4 million roubles from NEFCO’s Facility for Energy Saving Credits, which will be due for repayment in four years. The loan covers 90 per cent of the cost of the investment.

Modernisation of the street lighting in Gurievsk arouses no strong emotions among the local residents, whereas the plan to increase efficiency in heat supply is a sensitive issue that calls for political backing because the municipality currently subsidises the price of heat by around 20 per cent.

“Because of the high cost of the investment in heat production we’re compelled to raise the tariffs and this will no doubt stir up strong reactions as the increased prices will be felt in everybody’s pocketbooks,” says Yury Rudi.

For a retired person, the heating bill in winter may account for up to 40 per cent of the monthly income and so a potential increase in price will have an emotional impact. But without higher tariffs it is difficult to come up with the funding required from the municipality for these important projects. And without local municipal financing it is hard to obtain loan capital from international financial institutions. But as long as much of the heat goes to waste, everybody loses.

“Those with a low income can always receive financial support from the municipality to pay the higher tariffs. And once the energy projects have been completed, we’ll be able to offer cost-effective heat to local residents. The savings achieved by the municipality will also make more money available for social services to distribute to those who find it hard to make ends meet,” Rudi points out.

A  group of ladies in fancy dresses and flamboyant headwear bring to mind tea salons, while in the background well-dressed holiday makers can be seen strolling along the promenade admiring the gentle waves of the Baltic Sea. This is more or less what life looked like in the numerous spa resorts built on the shores of the Baltic at the end of the 19th century.

Svetlogorsk (formerly Rauschen), some 30 kilometres west of Kaliningrad near the Curonian Spit, has looked after its local heritage with due care. In summer, the number of people multiplies when Russian middle-class pilgrims flock to Svetlogorsk's snow-white beaches and picturesque seafront boulevard. Although straw hats have long since been replaced by baseball caps and loud Bermuda shorts, the past is still evident. The new hotels in the resort are built in German style with mock battlements, towers and trusses. On our visit to Svetlogorsk on a rainy autumn day the beaches are full of strollers who have come to the sea to relax.

NEFCO has also landed in Svetlogorsk in the form of a project to modernise wastewater treatment systems in the region. As part of the project, the local sewer network will be upgraded, the treatment plant’s compressors automated and new sedimentation basins built. Aside from NEFCO, funding for the project is provided by the local water company OKOS, the EU and Sweden.  In addition, the Russian federal and regional governments are investing in wastewater treatment in neighbouring communities.

The 35-year old plant in Svetlogorsk processes the wastewaters of 56,000 people living in the towns of Svetlogorsk, Zelenogradsk and Pionersk. The total volume of wastewater produced by the towns is around 12,000 cubic metres per day. When the project due for completion in 2013 is finished, the plant will handle wastewater from 67,000 people as a number of suburbs will be connected to the network.  As a result of the upgrade, the plant’s capacity will be tripled to 35,000 cubic metres.

The project plan also foresees the installation of frequency converters, the modernisation of pumping stations and measures designed to stop leakages from broken and rusty pipelines disrupting the water flow. Hence, the investment will contribute to the state of the Baltic Sea and the climate by reducing phosphorus and carbon dioxide emissions. The modernisation of the pumping stations and the installation of frequency converters are expected to reduce energy consumption by the wastewater treatment plant by at least 30 per cent.

“We pay around six million roubles for electricity per year so it’s no trivial matter. In the long run, the investment will yield considerable savings,” says Sergey Tomilov, General Director of the local water company OKOS.

General Director Tomilov was hand-picked for the project in June 2011 thanks to his 20-years’ experience in the field. His extensive contact network and solid experience is evident when we tour the wastewater treatment plant. Tomilov peppers his presentation with references to statistics related to his previous duties in St. Petersburg and other national and international assignments.

“The technical systems are at the end of their service life and worn out, which means that practically everything must be replaced here,” says Tomilov who rushes on to show us the rooms where the mechanical cleaning of the wastewater takes place.

For example, sludge handling is carried out manually meaning that there are people shovelling sludge into buckets that are then emptied into a container before being transported to a landfill near the plant.

According to preliminary calculations, the project will reduce phosphorus emissions by around 9 tonnes per year, which is equivalent to unprocessed emissions from a population of 14,000 persons.

“It’s a highly cost-effective way of reducing eutrophicating discharges to the Baltic Sea because in this project the per-tonne price of removing phosphorus is a fraction than the equivalent cost in the Nordic market," says Senior Investment Manager Ulf Bojö of NEFCO.

As the wastewater treatment plant in Svetlogorsk is located a few kilometres away from the Russian government’s summer residence, local wastewater treatment is of interest even in Moscow. However, the government’s involvement runs deeper than this. At the Baltic Sea Action Summit in Helsinki in 2010, Prime Minister Vladimir Putin pledged to speed up wastewater treatment in Kaliningrad. Subsequently, the promise has been translated into cash, which means that there is federal money available for the type of water projects currently being implemented in the Kaliningrad region. The funding provided by the Russian government is of decisive importance for the economic puzzle being worked out by project owners and a range of financiers involved in the efforts to save the Baltic Sea.

The Svetlogorsk project is part of an extensive programme covering several small towns and villages in the Kaliningrad region. The EU and NEFCO have identified 20 locations in urgent need of improvements to wastewater treatment systems. The first in line is Svetlogorsk and its surroundings, partly because of their exposed location on the coast and partly because of the proactive efforts of the local water company OKOS.

According to local media, the Svetlogorsk region attracts around one million tourists a year. This imposes additional requirements on wastewater treatment during the hot summer months. And if the water quality is not up to the required standard, the water company OKOS takes the blame.

“Bathwater must look clean to those who come here to holiday. That’s why it’s important that we modernise the wastewater treatment systems to make it possible for tourists to enjoy a clean Baltic Sea,” concludes Tomilov. 

Julia holds a Masters degree in economics, and before joining NEFCO she worked as a consultant and also has considerable experience from the wastewater treatment sector. We met Miss Shevchuk in Kyiv for an interview.

What does a normal day look like here at the office in Kyiv?

As you have noticed, the phones are ringing all the time, and we spent a great deal of time answering questions about NEFCO’s funding activities. Our clients and local business leaders are quite keen to find out the terms and conditions that have to be met before submitting their loan applications. And our staff members regularly participate in different business conferences and seminars where they market NEFCO investment services to business enterprises and other stakeholders. Currently NEFCO has a hundred investment projects going on in Ukraine and that, naturally, demands time and energy.

What is the most common sales argument that you use when selling NEFCO services to Ukrainian clients?

I try to emphasise the fact that NEFCO is a corporation owned by the Nordic governments because this implies that we are a stable and trustworthy business partner. I also point out the efficient administration we have in place to handle loan applications. Less bureaucracy means more efficiency.

Which industrial sector do you consider to be the most promising one in terms of business opportunities for NEFCO?

I think that all projects related to energy saving and energy efficiency have a huge potential in Ukraine, and most of the projects financed by NEFCO in this country are in that sector. Saving energy means saving money and, of course, money talks both in the municipal and corporate sectors.

What about renewable energy?

NEFCO has already financed a number of projects that utilise renewable energy in Ukraine particularly in the agricultural sector where pig manure is being used to produce biogas. Another good example is the use of rapeseed to produce biodiesel. We are also quite keen to finance wind and small scale hydropower projects as well as biomass schemes. Despite this, challenges still remain until we have sufficient feed-in tariffs to stimulate investments in, for instance, wind power.

You have recently carried out a marketing campaign in Ukraine. What was it about?

We approached hundreds of companies, mainly in the food and agricultural sectors, in order to market our Facility for Cleaner Production. The direct mail campaign has now been finalised and the next stage is to do the follow-up. We have already received a number of inquiries related to this campaign and, thanks to the fixed interest rate for these particular loans, it has been fairly easy to get new clients.

To what extent can you assist the clients in measuring the energy consumption before and after the project?

From time to time we do offer them concrete assistance to ensure that the expected energy savings are realistic and that we get the projected environmental results from the project. As a small financial institution, there are of course limits to how far we can stretch ourselves in providing concrete assistance on the ground, but we do our best. The new investment programme DemoUkraina, which was established by the Swedish government for financing district heating systems, will enable us to also offer technical assistance to our clients in this sector and this will undoubtedly make it easier to market these kinds of loans in the future.

The production process has been automated to the extent that the golden mass bubbles under the surface in silver-coloured pipes and cisterns completely out of sight until we enter the packaging department. Here an army of women in white are standing along the conveyor making sure that the blocks of the end product are neatly wrapped in aluminium foil and then placed in cartons ready to be delivered to shops and restaurants across the country.

The OJSC Kiev Margarine Factory accounts for about 30 per cent of the domestic output of margarine in Ukraine. The company also makes cooking oil and mayonnaise. One of its best known brands is Olkom, a name that adorns the margarine packets in shops. Even in the throes of a recession and financial crisis, demand for this type of basic commodity remains relatively steady generating a solid cash flow for the company. Last year, the company’s turnover reached EUR 38.3 million.

Recently, the OJSC Kiev Margarine Factory was modernised by replacing the existing heat exchangers, installing new low-energy pumps and upgrading the sequential control system. Most of the technical equipment for the project was supplied by Alfa Laval of Sweden.

“It was Alfa Laval that recommended NEFCO when we were exploring the options for applying for a loan to finance the project," says Chief Engineer Alexandr Kravchenko.

NEFCO extended a loan of EUR 350,000 for the project from its Revolving Facility for Cleaner Production. Repayments are based on the savings to be generated by the project. The Fund is authorised to finance up to 90 per cent of the total investment costs of similar projects that help save energy and reduce emissions harmful to the environment. In this case, the project contributed to lower emissions of mainly carbon dioxide, sulphur oxides and nitrogen oxides.

“Thanks to the upgrade to the production process and reduced power consumption we're able to save over EUR 79,000 per year. As an additional bonus, we’ve been able to improve production efficiency to the extent that today we produce 100 to 120 tonnes more margarine than before,” explains Kravchenko.

The company also recovers production residue, for example by selling fat to local soap makers. In doing so, they follow the same regime as applied by many factories in the West. But the Finnish and Ukrainian margarine cultures diverge on at least one point. My questions about the local debate on cholesterol levels and the effect they have on the company's product development efforts raise a laugh.

“We don’t really have that sort of debate here in Ukraine - I can’t remember any customer ever asking for a low-cholesterol or cholesterol-reducing margarine,” concludes Kravchenko with a wide grin.

The company has four factories which manufacture paints in Finland, Estonia, Russia and Belarus. Total annual production is around 25,000 tonnes. Now Eskaro has set its sights on expansion on the Ukrainian market, where it is building a new factory in the port city of Odessa in Southwest Ukraine.  

”We already have a seven per cent market share in Ukraine. Locating production here in Odessa means that we can cut transport costs and customs duties, as well as speed up deliveries to our Ukrainian customers. We reckon that perhaps within five years, we can capture around 20 per cent of the Ukrainian paint market,” says Pavel Kurochka.

NEFCO is helping to finance the new factory and project with a loan of EUR 2.2 million. The project's other backers are Swedfund and Eskaro's parent company, Eskaro Group Ab. The total investment is around EUR 6.7 million.

The new factory is being built on the outskirts of Odessa. Ground preparation was in full swing when we visited the site at the end of April. The actual landmark and foundation stone are still missing, but the sign with the project's name and financiers has already been put up at the main entrance to the site where the factory will be built. The muffled noise of the motorway to Kiev could be heard in the background when we visited the site. The infrastructure and good connections contributed to the factory's location.

Imports of raw materials will most take place via the vibrant Port of Odessa. Transport of end-products can be by road via the motorway that links Odessa with other cities in Ukraine. Thanks to a reduced need to transport Eskaro's products from Belarus and Russia, the new factory will cut the need for long-haul transport by around 230,000 kilometres a year. This translates into an annual reduction of around 800 tonnes in carbon dioxide emissions.

A visit to an ironmongery on the outskirts of Odessa shows why it is a lucrative idea to increase paint production in Ukraine. Huge industrial halls with kilometre-long aisles filled with cans of paint and interior design accessories attract affluent consumers from near and far. Similar shopping centres are springing up like mushrooms after the rain and demand for DIY services (do-it-yourself) is currently showing steady growth in Ukraine. A study of the statistics for paint consumption in Eastern Europe definitely shows growth potential. In Finland, consumption is around 21 litres a year per capita, whereas the corresponding figure for Estonia is 8 litres and for Ukraine 3 litres.

”We will focus on the manufacture of water solvent paints and a closed cycle for production. To put it plainly, this means that production will not result in the release of any environmentally harmful emissions to the surrounding watercourses,” says Pavel Kurochka.

One of the advantages of manufacturing water-borne paints is that it eliminates emissions volatile organic compounds (VOC) which are released from oil-based paints. Certain VOC released in vapour from paints can cause cancer. VOC also contributes to the formation of ground-levelozone, which in turn can damage plant growth. It is estimated the project in Odessa will indirectly reduce VOC emissions by around 870 tonnes a year.

Eskaro has operated a Sustainability Program for a number of years. Among other things, the Program focuses on rational use of resources, investments in modern environmental technology, minimising hazardous waste and certification of Eskaro's products. Eskaro is the only company in the Baltic States to have been certified with the EU's Ecolabel, a flower logo.

Pavel Kurochka points at one of the posters near the road leading to the building work and says that a start has already been made on marketing the new factory and Eskaro's paints. The campaign will be stepped up in various stages during the course of the year.

”Slowly but surely, the cleantech concept has beached also here in Ukraine. In pace with the demand for environmentally-friendlier products, it will also be easier for us as a company to profile ourselves. We will highlight that we can offer Ukrainian customers an environmentally-aware alternative when we formulate our marketing campaign,” says Kurochka.

Among the newcomers setting up factories in Kaluga and its surroundings are Volvo, Volkswagen, Stora Enso, Mitsubishi, Samsung and Peugeot & Citroën. Kaluga offers companies cheap land, the necessary utilities as well as tax reliefs. It costs up to 20 per cent less to establish a new factory in Kaluga than in Moscow, where price levels have, in many respects, run away and are now beyond the reach of many investors.

One of the companies responding to the siren song of Kaluga is Rani Plast of Terjärv, Finland. The company manufactures a wide range of plastic films for use as packaging materials in the industry and agriculture, such as for wrapping bales of hay.

“We’ve being exporting our products to the Russian market for a long time. By building a new factory here in Kaluga we’ll be able to relocate part of our production to Russia and cut down on the cost of transport and customs clearance," says Project Manager Juha Hakala.

NEFCO co-finances the project by extending a EUR 3 million loan. The other investors are Rani Plast, EBRD and Finnfund. The factory is being built in an industrial estate established by Lemminkäinen, a Finnish construction company. Located some 20 kilometres from Kaluga’s centre, the estate is known as ‘I-park Lemminkäinen’. The long-term plan is to have 20 to 30 companies build new factories in the area. Lemminkäinen assumes responsibility for the infrastructure meaning electricity and water supply, sewage treatment, access roads and web connections. Rani Plast has signed a turn-key contract, under which Lemminkäinen not only builds the infrastructure but also takes care of all paperwork and contacts with the local authorities.

“Primarily, our marketing efforts target companies representing the cleantech sector. Companies that choose to establish here will save twelve to eighteen months as they will not be required to use resources for building the infrastructure required for the factory,” says Managing Director Mika Sandin of Lemminkäinen Invest.

The raw material for the plastic products to be made by Rani Plast in Russia is polyethylene, a more environment-friendly alternative to equivalent films made of polyvinylchloride (PVC). The latter is  a common product available in Russia for packaging purposes. PVC production involves the use of various phthalates as plasticisers which pose a number of risks to the environment. The EU has classified certain phthalates as toxic substances that can cause hormonal disruption in humans.

Additionally, manufacturing will be based on a closed-circuit production process with all the surplus plastic being recovered for re-use. As a result, the consumption of raw materials will be reduced. Because the factory will make use of the best available technology, energy consumption will also be much lower than in equivalent Russian production facilities. According to the calculations made by NEFCO and Rani Plast, the factory’s annual carbon dioxide emissions will be 10,750 tonnes less than those of Russian competitors.

“Most of the workforce will be recruited from the village of Vorotynsk located near the factory. We’re initially looking to hire 30 to 40 factory workers who will come to Finland for training in the summer," says Juha Hakala.

He underlines that it is important for Rani Plast to offer the local employees competitive wages and terms of employment to encourage them commit to the job long term. Rani Plast’s Kaluga factory will have six production lines with the personnel working round the clock in three shifts. Hakala says that the factory will be able to produce close to 16,000 tonnes of plastic film with this concept.

While most of the raw materials used for Rani Plast’s products are based on fossil oil, efforts are already under way to develop optional biologically degradable products. Product development is carried out by Rani Plast’s laboratory in Terjärv, home to the owners the Ahlbäck family.

“A number of biologically degradable alternatives based on potato starch, for example, are already commercially available, but it’s hard to produce industrial packaging materials on a large scale when access to raw material is not ensured,” says Hakala.

But the market is changing. For example, much of the toilet paper packaging used in Europe is being made of biologically degradable raw materials. When the use of equivalent packaging becomes more widespread, it pays to be ready.

“It’s important that the Kaluga factory is based on the same technical concept as the Terjärv facility. It will enable us to adjust production to demand and the availability of biologically degradable alternatives," concludes Hakala.

The NIB and NEFCO managed BSAP Fund was set up in 2009 in order to provide grants for technical assistance to projects that support the implementation of the HELCOM Baltic Sea Action Plan (BSAP). Sweden has committed SEK 90 million (EUR 9 million) to the fund and Finland EUR 2 million. So far, five projects have been approved for financing and six more are in the pipeline. Of the fund's capital, one-fifth has been committed.

"The aim of the BSAP Fund is to be a link between a promising project idea and the financing of its implementation by facilitating and speeding up the preparation of bankable projects. Therefore I think the cooperation with other Baltic Sea actors and financial institutions is crucial," says Mr Alm.

"So far, most projects have been identified by us. At this stage, our main task is to spread the word in order to attract more applications," he continues.

Projects approved for the grant financing range from EUR 18,000 up to EUR 1 million. The majority of the approved and pipeline projects target manure management and small scale wastewater treatment in Russia.

According to Anders Alm there has been a positive shift towards more interest and political will for the restoration of the ecological status of the Baltic Sea, and a risen awareness of the importance of the Baltic Sea's ecosystem for the region's economical development.

As examples, he mentions Sweden's presidency of the EU in 2009, when Baltic Sea issues were at the top of the agenda, and also Sweden's growing budget allocation for the marine environment. This part of the national budget has grown steadily and has now reached SEK 2 billion (approx. EUR 200 million). Another example is Poland, where discharges from wastewater treatment plants are being cut by half.

Despite the political will and growing interest in Baltic Sea issues, the number of financeable projects in this sector is not big. NIB has a specific lending facility, BASE, aimed at projects enhancing the state of the Baltic Sea. Of the EUR 500 million allocated to the facility, 72% was still unallocated at the end of 2010.

"Contrary to many other sectors, finding bankable Baltic Sea projects generating income to pay back a loan is quite a challenge. I am, however, confident that they exist," Mr Alm explains.

He also believes HELCOM's efforts to identify projects based on the national implementation plans will generate projects eligible for grant financing. According to Mr Alm, the ideal would be to have a dozen new projects in the pipeline by the end of the year.

"First we need to show that by granting financing through the BSAP Fund we can help Baltic Sea projects attract financing. If we succeed in showing concrete results and that there is a demand for preparatory grant financing, then I think more capital and donors will follow," he concludes.

Mr Alm has considerable experience of international organisations and financial institutions. Before joining NIB in February 2011, Mr Alm worked as Head of Unit at the Swedish Ministry of Environment. During his five years at the Ministry his main area of responsibility was the marine environment. Mr Alm was the head of the Swedish delegation to HELCOM.

To combat this problem,NEFCO has established an environmental fund, which is to be managed by Prime Finance Bank, operating in St. Petersburg and the Leningrad region. This is not the first time that NEFCO has embarked on financing environmental banking. The corporation has, for example, worked with Bank Lviv in Ukraine, and gained valuable experience in the process.

Although the tumultuous 90’s and the recent financial crisis have rattled the financial credibility of many Russian banks, the small, conservative and cautious Prime Finance Bank has managed to maintain a solid financial reputation. According to Ulf Bojö, Senior Investment Manager at NEFCO, Prime Finance Bank is the epitome of responsible risk taking.

For NEFCO, the aim of establishing an environmental fund with a Russian bank is to promote energy efficiency within the Russian industrial sector. Mr. Bojö points out that there are two main concerns about energy efficiency in Russia today. First, the Russian banking system is still not well developed to finance energy efficiency projects, and there are several structural problems as well as a dearth of knowledge on executing energy efficiency projects. The cooperation between NEFCO and Prime Finance Bank is intended to demonstrate that environmental banking is not only energy efficient but cost-efficient as well.

The Prime Finance Bank has already taken the first crucial steps to acquaint itself with the philosophy and practicalities of environmental banking by participating in an educational programme Finance Corporation. The programme is specially designed for Russian banks
that want to finance energy related investments within the Russian industry.

According to Mr. Bojö, there are several advantages in working directly with the Prime Finance Bank. First, NEFCO will benefit from the bank's existing, extensive network of clients and partners. For its part, Prime Finance Bank will gain valuable experience on environmental banking. Together the two financial organizations will create synergies which will result in efficient labour and costs inputs.

During the course of the project, Prime Finance Bank will regularly report back to NEFCO about the progress of each business operation.The total cost of the project is EUR 2.2 million and NEFCO will contribute EUR 1 million. Other partners involved in the project are the Danish and Finnish governments and the Global Environment Facility, which is administered by the World Bank.

The overall aim of this project is to promote energy efficiency in St. Petersburg and the Leningrad region, and the environmental fund is therefore open to all Nordic organizations, which currently have a presence in the region. The first projects financed by NEFCO and Prime Finance Bank are expected to be launched during the first half of 2011.

What does a framework agreement with Ukraine mean for NEFCO?

It means that NEFCO now has the status of an International Finance Institution (IFI) in Ukraine and this gives the corporation several advantages. For example, NEFCO is now able to lend money to municipalities and regions. NEFCO has several projects in the pipeline in Ukraine and these can be implemented within the framework of the agreement.

It took quite a long time to ratify the agreement. Why?

The political turbulence in Ukraine – a change of government, new politicians and officials, together with the fact that NEFCO is not the biggest actor within IFIs, have probably been the main reasons for the delay.

At the moment NEFCO has approximately 85 on-going projects in Ukraine. Is that a lot or too little?

It’s too little. There should have been more. When Poland joined the EU and we were not able to finance new projects there, we hoped that Ukraine would take over Poland’s role as one of the leading markets for NEFCO finance. However, our projects are dependent on an attractive investment environment for Nordic companies, and it seems Ukraine has not been as attractive as Poland. Another reason for the low level of investment is the international financial crisis which has hit Ukraine particularly hard. This has led to several investment opportunities, both local and foreign being cancelled.

Within which sectors do you believe that the amount of projects will increase most? Will most of the NEFCO-financed projects continue to be loans for cleaner production?

NEFCO will mostly finance projects within the energy saving and energy efficiency sectors. One of our goals is to increase the use of local energy in order to decrease the importation of gas. Ukraine’s economy has been subjected to a long period of stagnation, which has seen many commercial banks cutting their lending to domestic customers.

Why has NEFCO chosen to finance environmental projects in Ukraine?

This is precisely NEFCO’s philosophical mission and what we have been doing for the last 20 years - investing in environmental projects that have business potential in countries where commercial loans are difficult to obtain.

Does NEFCO have any possibility to influence environmental policies in Ukraine?

I believe that NEFCO has a good chance of influencing Ukraine’s environmental policies by setting good examples. Within the public sector, we can show that environmental investments are no more difficult to finance than any other projects. By investing in successful commercial ventures in energy savings, heating and wastewater, we can demonstrate that environmental investments make good business sense and are essential for changing the Ukrainian people’s way of life for the better.

What can Nordic companies offer Ukraine?

Nordic companies tend to be quite effective in the area of industrial environment. They are innovative and invest in development, and there is a tradition for balancing production and the natural environment. In general, Nordic companies have a very holistic approach to business, and are not afraid to invest in long-term ventures.

What can NEFCO offer these Nordic companies?

Besides financing and environmental knowledge, NEFCO has a very good business network in Ukraine and can offer valuable experience accumulated from financing environmental projects in Eastern Europe for the past 20 years.

Rain pours down as the wind turbine blades start revolving and one speech after another is delivered in the biting wind. For a short while, we are at the mercy of the elements but soon find ourselves in Kvalheim’s warm and cosy club house being served sour cream porridge, cured meat, juice and coffee.

The new wind farm in Kvalheim boasts eight 2.3 MW units fitted with Enercon E70 turbines. Five Vestas windmills, each with an output of 859 kW, had been erected on the site earlier. The wind farm is located in the outermost archipelago of the Vågsøy municipality where excellent wind conditions ensure that the revolving rotors provide 3,000 households with electricity. Not bad for a locality with 5,996 inhabitants. One of the chief investors in
the wind farm is the utility company Vardar.

“Our investment in the Mehuken wind farm here in Kvalheim is a natural extension to our operations. After all, we invest in renewable energy in accordance with the policy outlined by our shareholders, and this wind farm is a natural addition to our project portfolio,” says CEO Johannes Rauboti of Vardar.

Other investors include Kvalheim Kraft, Østfold Energi and Dong Energy of Denmark. Vardar is a utility company owned by the municipalities in the county of Buskerud. Originally called Buskeruds fylkeskraft, the company was renamed Vardar in 2002.

“In 2005, we made a decision to invest in wind power in the Baltics. Through our contacts in Pärnu – which is incidentally Buskerud’s twin town in Estonia – we got in touch with the key personnel at Eesti Energia, a company that was keen to invest in wind farms in Estonia," explains Rauboti.

Vardar seized the opportunity by setting up a subsidiary by the name of Vardar Eurus. NEFCO currently holds a ten percent interest in the company that owns wind farms in Estonia and Lithuania. Rauboti confirms that the investments in the Baltics represent an increasing chunk of Vardar’s balance sheet.

Construction of wind power has been favoured by a guaranteed price subsidised by the Estonian State. However, as the subsidy, currently EUR 54 per produced MWh, which is paid on top of the market price, only applies to a limited percentage of wind-generated electricity, it is unclear whether the Estonian Parliament will raise the production ceiling. To date, Estonia has built 142 MW of wind power, only five megawatts less than Finland.

Vardar Eurus holds a 25 per cent stake in Nelja Energia, an Estonian project management company that has initiated many of the projects financed by Vardar Eurus and other investors. At the time of our visit to Nelja Energia’s head office in Pirita, Tallinn, part of the staff were working on new biogas projects for the municipalities of Oisu and Vinni in Estonia.

"There’s a great deal of unharnessed potential in this sector. By producing biogas from cow or pig dung close to large agricultural establishments, we can promote the use of local energy sources that are unaffected by world market prices as well as offer additional revenues for farmers," says Chairman of Board Martin Kruus of Nelja Energia.

The project is to be financed by the newly established Biofond OÜ owned by Vardar Eurus, the Estonian investment company Freenergy and Nelja Energia. NEFCO has recently decided to buy 30 per cent of the shares of Biofond and thereby contribute to the financing of the projects. However, there is a time limit for these types of investments in the Baltics as far as NEFCO is concerned. Under NEFCO’s new Baltic policy, the corporation can only finance
projects that benefit the Baltic Sea and these investments will only be extended up to the end of 2011. After that, NEFCO will focus on Russia, Ukraine and Belarus.

“We’ve established that these biogas projects will reduce phosphorus emissions by close to 57 tonnes per year. And as an additional bonus in this connection,we’ll also be able to address methane emissions which will yield an annual decrease of almost 53,000 tonnes in carbon dioxide emissions,” says Karl-Johan Lehtinen, Senior Manager responsible for environmental affairs at NEFCO. At present, there is only one operational biogas facility in Estonia: a NEFCO-funded biogas reactor in the village of Valjala in Saaremaa. Fervent efforts are currently being made to launch a similar project in Oisu where the local farmers have committed to supply cow dung for a jointly-owned biogas facility capable of generating heat and electricity for local needs.

“All in all, there are around 3,000 cows in Oisu and the neighbouring villages. Most of the milk is delivered to Tartu where it’s processed into cheese and other products. As every cow produces about 6 tonnes of manure per year, it should be more than enough for the foreseen biogas production,”says Farm Manager Aive Hommik of OÜ Estonia.

At the negotiations with project owners and the other investors in the biogas projects, NEFCO has been represented by Vice President Solveig Nordström who has worked with the financing of environmental projects in the Baltic region for over 20 years. Nordström has also worked as a Board Member in Vardar Eurus. She will retire in December 2010.

“It feels great to have been involved in the efforts to build sustainable energy production in the region. Now it’s time to hand this, just like other projects, over to my younger colleagues at NEFCO. My hope is that the project will serve as an example that can be applied in other parts of Eastern Europe," says Nordström.

“In fact, we are exploring possibilities to invest in biogas facilities or other renewable energy in the Baltic countries or for example in Ukraine,” says Martin Kruus of Nelja Energia.

Watch slideshow