Issue 2, 2012. April-May



A push to save energy by forcing construction companies to follow stricter laws is stumbling on fears that more regulation could stifle the building sector.

Nino Patsuria

Buildings and homes in the European Union are three to four times more efficient than those in Georgia, according to energy efficiency specialists - a difference that is costing Georgians nearly twice as much in gas payments.

70-80 percent of the country's gas consumption is used to heat Georgians' houses and apartments. That is nearly twice as much as our European neighbors, where on average just 40 percent of gas consumption is used for heating.

More Regulation, Better Efficiency?

Energy conservation specialists like Katrine Melikidze see an easy solution: strengthen the laws that regulate construction practices so new buildings meet higher standards.

Even simply insulating existing residential housing could cut down national heating costs by as much as 40 percent a year, she noted.

But insulation and other energy efficient housing material is expensive and the government is unwilling to pass on the cost to either consumers or the construction companies.

While creating energy efficient housing was a government priority before the 2008 war and financial crisis, Deputy Energy Minister Mariam Valishvili said today the government believes stricter building regulations could harm the construction industry, a vital sector for job creation that is slowly recovering.

"... this is a very complex issue and would also require state subsidies since the construction industry is very weak and cannot bear new regulations," she said.

"Also the state cannot disburse subsidies at the moment; now is not the time for such projects."

Valishvili added that foreign donors have started programs to fill the gap while the government waits: both the European Bank for Reconstruction and Development (EBRD) and USAID are providing funds to encourage businesses and households to purchase more energy efficient building materials.

EBRD created a $35 million credit line to Georgian banks in 2008 and has already disbursed about $20 million through three Georgian banks to both corporate and household beneficiaries

However, few of the funds go to construction companies, noted Irakli Mekvabishvili, a senior banker at EBRD.

The majority is given to businesses investing in hydro-power development projects, with just ten percent of the loans going to households.

The Energy Efficiency Center Georgia, a resource and consultancy center for businesses and households seeking to save on energy costs, has also noted a decline in interest from construction companies, according to Director Giorgi Abulashvili.

Construction companies like Axis agree that while they recover from the financial crisis the industry is not ready to take on the extra cost of investing in energy efficient materials, according to Goga Kapanadze, Axis' General Director and the head of the Georgian Developers' Association.

"Certainly the law should regulate this, but if the state makes energy-efficiency standards obligatory today, it will bring [the construction sector] to a halt," he said.

"... you cannot say for sure how much using energy-efficiency materials increases costs, it may be by 5 percent or by 100 percent; it depends on each separate project, but we cannot survive with new rules today... we have just overcome the [financial] crisis and a new Eurozone crisis is imminent. Plus this is a political year with elections approaching, so companies prefer to wait for a while until situation is settled."

Abulashvili pointed out that energy efficient materials will only increase prices by about ten percent. In addition he commented that higher energy efficiency will bring long term benefits for the entire economy.

Locally Produced Materials, Less Cost

One way to escape higher costs could be using locally produced construction products, according to research conducted by the USAID supported Economic Prosperity Initiative (EPI).

The EPI report notes that locally produced energy-efficient products made from basalt and perlite could be an economic way for developers to use better materials at less cost than imported goods.

But Melikidze stressed that building companies will not spend extra - even domestically produced perlite costs approximately twice that of less efficient competitors - until they are required to do so by law.

"This is a vicious circle: first of all companies do not use green construction practices because there is no law and they are ill-informed, and local producers are not geared up to the local market because market demand is restricted since the law does not require it," she said.

"One cannot blame anyone in particular [neither the producers nor the developers] because [everything is] interconnected and this circle will not be unlocked until the state reacts to it."

Tamar Rukhadze, the head of the Urbanization and Construction Department at the Ministry of Economy and Sustainable Development, said new legislation for construction standards - including energy efficiency standards - is being developed. There is no indication, however, of when the draft law will be sent to parliament.

Valishvili, however, stressed that any new law has to take the construction sector's recovery into consideration.

"We cannot make energy-efficient standards obligatory at the moment ... although they save money over the long-term, they will increase initial investments and we do not want to press the industry in this way," she said, adding "the market will define the demand itself."

But Temur Megrelidze, the director of Arcitech responsible for the technical standards at Arci, a local construction company, said it will take a law to force consumers and developers to spend more on energy efficient products.

He noted that while Arci, a local construction company, prioritizes energy efficient standards, the use of more expensive materials makes the company less competitive in the current market. New laws requiring all construction companies to meet the same standards will help level the market, he said.

"If there is a legal obligation to observe green construction regulations it will be better for everyone, and will eventually lead to [better] competition," he said, noting that even consumers balk at the cost of energy efficient and eco-friendly supplies.

"Market demand cannot help this; it can only be solved through the law."