The World Bank Poland Energy Efficiency in Single Family Buildings Program (P170131) Program Information Documents (PID) Appraisal Stage | Date Prepared/Updated: 16-Mar-2021 | Report No: PIDA227700 Nov 25, 2020 Page 1 of 10 The World Bank Poland Clean Air Through Greening Residential Heating Program (P170131) BASIC INFORMATION OPS_TABLE_BASIC_DATA A. Basic Program Data Country Project ID Program Name Parent Project ID (if any) Poland P170131 Clean Air Through Greening Residential Heating Program Region Estimated Appraisal Date Estimated Board Date Practice Area (Lead) EUROPE AND CENTRAL ASIA 12-Apr-2021 27-May-2021 Energy & Extractives Financing Instrument Borrower(s) Implementing Agency Program-for-Results Financing Ministry of Finance National Fund for Environment Protection and Water Management (NFOSiGW) Proposed Program Development Objective(s) The Program development objectives are to save energy and reduce emissions that contribute to air pollution through the promotion and adoption of sustainable heating and energy efficiency investments in single family buildings in Poland. COST & FINANCING SUMMARY (USD Millions) Government program Cost 6,061.39 Total Operation Cost 6,062.14 Total Program Cost 6,061.39 Other Costs 0.75 Total Financing 6,062.14 Financing Gap 0.00 FINANCING (USD Millions) Total World Bank Group Financing 300.00 World Bank Lending 300.00 Total Government Contribution 4,215.79 Nov 25, 2020 Page 2 of 10 The World Bank Poland Clean Air Through Greening Residential Heating Program (P170131) Total Non-World Bank Group and Non-Client Government Financing 1,546.35 Private Capital and Commercial Financing 1,546.35 of which Private Capital 1,546.35 Decision The review did authorize the team to appraise and negotiate B. Introduction and Context Country Context 1. Prior to the COVID-19 crisis, Poland had sustained uninterrupted growth for nearly three decades and achieved high-income status in less than 15 years. Few middle-income countries have witnessed such consistent broad-based and inclusive growth – both fast and stable (with growth averaging 3.6 percent in the post global-financial crisis period) and feeding through to poverty reduction and shared prosperity. Growth over this period had a positive impact on poverty and shared prosperity: the share of the population living in poverty (at 2011 PPP US$5.50 per person per day, the international poverty line corresponding to upper-middle income countries) declined from 9.4 percent in 2005 to 2.6 percent in 2018, despite the global financial crisis, and the share of the population under the national1 poverty line declined between 2008 and 2019. Stronger than average growth in incomes of the bottom 40 fed into a positive shared prosperity coefficient and declining income inequality statistics. This inclusive growth was supported by a consistent set of policies, including those for European Union (EU) accession and membership, that fostered productivity, strengthening of institutions, investment in human capital, encouraged entrepreneurship and emphasized sound macroeconomic management. 2. The COVID crisis pushed the Polish economy into recession in 2020 and the response to the crisis has narrowed the fiscal space to respond to future shocks. Output contracted by 2.7 percent in 2020, a more moderate decline than seen in neighboring countries. The large support package to households and firms moderated impacts on unemployment, incomes and consumption, protected viable jobs and firms. Although household impacts were diminished by support measures, 30% of households reported declines in incomes at the height of the first wave of lockdowns and poor working households have been vulnerable to employment impacts, resulting in poverty projecting to increase in 2020 and remain above 2019 levels until at least 2023. The unprecedented policy response, combined with falling tax revenues, has narrowed available fiscal space. The general government budget deficit is estimated to have increased to 8.5 percent of GDP in 2020 from 0.7 percent the previous year. The general government debt (according to the EU definition) is estimated to have increased by 12.5 percentage points in 2020 to 54.858.2 percent of GDP, and is expected to increase further to 59.5 percent of GDP this year, as the general government deficit will exceed 5 percent of GDP. Debt levels are significantly higher than those projected in the 2019 Convergence Programme, in which the general government debt-to-GDP ratio was expected to decrease from 48.9 percent of GDP in 2018 to 40.6 percent of GDP by 2022. Until a pathway out of the pandemic emerges through effective vaccination or containment, lockdowns could undermine the sustained recovery. 1 Statistics Poland, 2020. Economic poverty rates in Poland in 2019. Nov 25, 2020 Page 3 of 10 The World Bank Poland Clean Air Through Greening Residential Heating Program (P170131) 3. Medium-term growth prospects will be shaped by the path and timeline of recovery from the COVID- 19 pandemic, as well as broader structural constraints linked to labor force dynamics and productivity drivers. Higher levels of private investment, an improved innovation ecosystem, and further upgrading of global value chains are key to supporting higher productivity and growth going forward. With deteriorating demographics and the rollback in the statutory retirement age, the shrinking workforce will feed into a more than doubling of the old age dependency ratio by 2060 that will put pressure on health services and pension system finances. In addition, signs of emerging skill mismatches point to potential misallocation of labor with adverse effects for productivity. Total Factor Productivity (TFP) growth in Poland has slowed significantly after the global financial crisis, falling from an average of 2.6 percent over 1997-07 to 1.2 percent on average over 2010-19. Prior to 2008, strong TFP growth was supported by the rapid institutional and structural transformation and by Poland’s integration into the EU economic space and European supply chains. Over the medium term, growth is expected to recover at a moderate pace following the COVID-19 crisis, and converge to potential growth rates of close to 3 percent, supported by the sizeable economic package implemented by the government in response to the COVID-crisis, EU- funded investments, including from the Next Generation EU, more rapid capital accumulation and marginal TFP gains. 4. Poland’s development path still faces vulnerabilities. To consolidate gains and address the complex challenges of the future will require strong institutions. The Systematic Country Diagnostic assesses Poland’s most critical institutional constraints and identifies priorities where targeted support could further boost shared prosperity in a sustainable manner. First, Poland’s dramatic demographic shifts, combined with the rapid pace of global technological change, call for effective institutional solutions. Second, as overall income levels continue to converge to those of the EU, it will be important to address risks to increasing inequality. Especially significant are the disparities between regions and with local communities where needs are the greatest and institutional capacity is relatively weak. Multiple regions in Poland are among the 20 poorest in the EU. Third, sustainable management of natural resources, including water and air quality management, is fundamental to the well-being of Poland’s citizens. Accelerating the transition to a low-emissions economy will require both innovative solutions and strong institutions to deliver results. Sectoral and Institutional Context 5. Poland has come under considerable national and international scrutiny because of air pollution . Poland has made considerable progress in reducing air quality (AQ) pollutants such as SO2 and NOX. However, exceedances of limit values of coarse and fine particulate matter (PM10 and PM2.5, respectively) and benzo(a)pyrene in the winter season remain a serious problem, despite observed reductions in the emission of particulate matter precursors2. Annual ambient concentrations of PM10 and PM2.5 in Polish cities often exceed the maximum levels allowed under EU law and the more stringent World Health Organization (WHO) AQ guideline value. Failing remedial actions, the European Commission (EC) could impose financial penalties on the country. Poland has 36 of the 50 most polluted cities in the EU3 and, as a result, many citizens are exposed to high levels of ambient air pollution, notably fine particulate matter that contribute to respiratory illnesses including lung cancer, chronic obstructive pulmonary disease, ischemic heart disease, stroke and respiratory illness4. Respiratory illness caused by exposure to fine particulate matter result in approximately 46,300 premature deaths in Poland according to the European Environmental Agency. Poland disproportionately contributes to the number of premature deaths attributed to PM2.5 pollution in the EU-27, accounting for 12.2 percent of all premature deaths while only accounting for 7.5 percent of the population. A 2019 World Bank report estimated that the cost of ambient air pollution amounts 2 GIOS, 2018. �Condition of the Environment 2018, Report on Poland� Environmental Monitoring Library Warsaw. 3 World Health Organization, 2018. WHO Global Ambient Air Quality Database (update 2018) 4 European Environment Agency, 2019 “Healthy environment, healthy lives: how the environment influences health and well-being in Europe� EEA Report No 21/2019. Nov 25, 2020 Page 4 of 10 The World Bank Poland Clean Air Through Greening Residential Heating Program (P170131) related to mortality and morbidity amounts to about US$31-40 billion, equivalent to 6.4-8.3 percent of GDP in 2016.5 6. Residential buildings, and among them single-family buildings, represent one of the largest contributors to ambient air pollution. Two AQ management assessments6 found that ambient concentrations of particulate matter are significantly higher during winter months and during evening hours and weekends, because of the burning of highly-polluting solid fuels (e.g., coal, biomass and waste) in small inefficient boilers for heating single-family buildings (SFBs). Residential heating is the biggest source of PM2.5, contributing just under 80% of total emissions, and tackling this sector has been the most challenging. Additional important contributors to ambient air pollution include energy, transport, transboundary, industry and agricultural sources, however, pollution from these sectors are more evenly spatially and temporally distributed. The energy sector continues to be an important source of SO2 and NOx, and transport a source of NOx, although SO2 and NOx have decreased by 80% and 30% respectively since 1990 and are no longer considered to be widespread problems across the country. In southern Poland, transboundary sources contribute to PM2.5, reaching more than 60 percent in the Śląskie voivodeship. In order to enhance AQ outcomes, collaborative approaches at the regional level are needed to complement domestic measures. Further measures are also needed to address ammonia emissions from agriculture and emissions from industry. The AQ assessments also noted the limitations in national emissions inventories related to: (i) real-life emissions; (ii) activity statistics related to the use of coal wastes and non-commercial biomass use in stoves and boilers; and (iii) burning of waste materials in SFBs. 7. The transition of the residential heating sector has the potential to contribute towards improved AQ and towards inclusion outcomes through reduced energy poverty and greater thermal comfort of poorer households, as well as towards the 2030 energy and climate targets. The Polish building stock consists of more than 6.3 million structures7, of which about 308,000 are nonresidential (public and commercial), 535,000 are multifamily apartment buildings and the remaining 5 million (83 percent of the building stock) are SFBs8. Approximately half (52 percent) of the population live in SFBs, or about 19.6m people; 16 percent of this population is considered to be at risk of poverty compared to 10 percent of the population living in multifamily buildings9. About 85 percent of SFBs rely on coal and/or firewood, as the main fuel for their heating, amounting to about 4 million coal-fired boilers (which collectively consume more than 9 billion tons of coal per year). About 29 percent of buildings have boilers that are more than 10 years old, with 3 million of these installations being manually fed boilers, an outdated technology which leads to significant air pollution.10 About one-third of the SFBs are located in urban areas and two-thirds in rural communities. About 80 percent of the estimated 5 million SFBs were constructed before 1990, when even basic energy efficiency measures, such as insulation, were rarely used; this contributes to substantial energy waste and inadequate thermal comfort, the latter being reported by 11 percent of SFB owners. The final energy consumption for space heating and domestic hot water for these buildings is very high (69 percent and 15 percent, respectively) and ranges from 125 to 300 or more kWh/m2. 8. The Government has made clean energy and emissions reduction priorities a cornerstone of its stated energy policy. In line with the EU’s energy and climate targets for 2030, Poland established a 10 -year integrated national energy and climate plan (NECP) for the period from 2021 to 2030, which includes a target of 23 percent renewable energy and improving energy efficiency by 23 percent (from 2007 levels). On December 11, 2020, the EU Member States including Poland agreed on a joint NDC (EU NDC Update), which included a commitment to 5 World Bank, 2019. “Air Quality Management in Poland, Final Report�, World Bank Report AUS0000585. 6 Ibid and World Bank, 2020. “Functional Review of Air Quality Management, Draft Report� 7 Statistics Poland, 2013 8 480,000 out of the total 6.3 million structures are listed as uninhabited. 9 World Bank analysis using Household Budget Survey, 2018 and Energy Survey, 2018. 10 Design Solutions for nZEB Retrofit Buildings; Rynska, Elzbieta, Kozminska, Urszula, Zinowiec-Cieplik, Kinga, Rucinska, Joanna, Szybinska-Matusiak, Barbara, IGI Global, 2018. Nov 25, 2020 Page 5 of 10 The World Bank Poland Clean Air Through Greening Residential Heating Program (P170131) reduce GHG emissions by 55 percent (of 1990 levels) by 2030. In January 2021, the GoP released its energy strategy for 2040 (PEP2040) which includes pillars for a just transition, zero-emission energy systems and improved AQ, which include measures to scale-up renewable energy (solar PV, offshore wind) to 39 percent, shift to low/no emission buildings and housing (including electrification and decarbonization of heating) and efforts to decarbonize gas and heating systems. The latter includes a goal to increase the amount of decarbonized gas (hydrogen, biogas) in the existing natural gas networks by at least 10 percent by 2030. MoCE has also announced plans to phase-out coal in the residential heating sector, through a ban of coal use in urban areas (2030) and rural areas (2040); phase- out coal mining by 2049; and a reduction in coal-based power generation from 74 percent today to 56 percent (2030) and 11-28 percent (2040). 9. While boiler and household improvements would yield substantial benefits, several barriers have made this transition challenging. These include: (i) high upfront costs of thermal retrofits and boiler replacement; (ii) potentially higher recurring energy bills; (iii) weak and/or inconsistent local air pollution regulations and enforcement; (iv) limited access to other infrastructure for heating; (v) overlapping government programs; and (vi) lack of awareness and know-how. 10. The GoP has responded to these barriers with a clean air program targeting single-family buildings. In September 2018, the GoP launched the Clean Air Priority Program (CAPP) – a PLN 103 billion (€24 billion), 10-year initiative aimed at reducing low stack emissions. Implemented by the National Fund for Environment Protection and Water Management (NFOŚiGW), the CAPP has the specific objective to “improve the energy efficiency of existing single-family housing resources through thermal modernization and upgrading of heating furnaces.� The program deploys a system of subsidies, tax incentives and targeted loans to help nearly 3 million SFB owners to replace their solid fuel boilers and conduct thermal retrofits. The subsidies are set to vary based on the types of measures implemented and currently vary from 30-50 percent, but an increased level of subsidy is planned for low-income SFB owners. PforR Program Scope 11. Scope and objectives. The Bank’s proposed PforR objectives, targets and scope have beeen developed to closely align with those of CAPP, namely “to save energy and reduce emissions that contribute to air pollution through the promotion and adoption of sustainable heating and energy efficiency investments in single family buildings in Poland.� The scope of the PforR is defined as the full CAPP program that is currently operational including the complementary tax relief scheme under MoF, with two key differences: (i) while CAPP does include provisions for eligible SFBs to purchase new, eco-design coal boilers, the PforR would not support them; and (ii) while CAPP is a 10-year program, the PforR would be limited to a 5 year duration. Over the life of the PforR (i.e., ~July 2021-June 2026), it is estimated that about 813,000 SFBs would be served (thermal renovations, boiler replacement or both). The proposed PforR would also take into account major planned enhancements to CAPP, such as the inclusion of commercial banks and the launch of a low-income component, as they become operational. 12. Institutional arrangements. The Program is managed by the NFOŚiGW under the MoCE and implemented through the 16 Regional Funds for Environmental Protection and Water Management (WFOŚiGWs). NFOŚiGW is responsible for (i) overall program coordination and implementation; (ii) development of all program rules, guidelines, and procedures including SFB and equipment eligibility criteria; (iii) developing financing agreements with the regional WFOŚiGWs; (iv) Program communications and application platforms; (v) Prog ram monitoring, oversight, evaluation and reporting; and (vi) financial mobilization, management and disbursements. The 16 WFOŚiGWs are responsible for (i) receipt and processing of applications from beneficiaries; (ii) disbursement of grant payments against eligible expenses; (iii) ex-post inspections and oversight; and (iv) reporting to NFOŚiGW. Currently, commercial banks do not participate in the CAPP in a formalized way but may provide commercial loans to SFB owners. Nov 25, 2020 Page 6 of 10 The World Bank Poland Clean Air Through Greening Residential Heating Program (P170131) 13. Current program status. As of February 26, 2021, CAPP has received approximately 212,700 applications for PLN 3.47 billion (US$929 million) of grants (with PLN 384 million or US$103 million of loans) and signed 179,700 co-financing agreements for PLN 3.00 billion (US$804 million) of grants (with PLN 204 million or US$54.6 million of loans). Demand has remained relatively constant over the past year, despite the onset of COVID-19. The Program has been through various adjustments since its inception in 2018, including: (i) simplification of the subsidy levels and application process; (ii) integration with the “My Electricity� program to provide subsidies for solar PV under one application; (ii) retroactive subsidies for investments initiated up to six months prior to application submission; and (iii) launch of Part 2 of the program for lower-income households on October 21 2020, allowing them to apply for an elevated subsidy level. 14. Disbursement-linked indicators. Disbursement-linked indicators (DLIs) and results (DLRs) will be agreed as key results linked to the Program, and disbursements would be triggered by the achievement of these. The proposed DLI framework is structured around three areas: policy and regulatory enhancements (~US$55 million), program design and operational enhancements (~US$75 million), and program physical results (~US$170 million). Actions in the first two areas would be identified in order to improve the program’s ability achieve its ultimate objective, be effective and ensure sustainability. Key considerations were taken into account in their selection: (i) the DLIs signal and monitor critical milestones for the achievement of the PDO; (ii) they provide incentives to reward performance by ensuring mobilization of commercial financing and accessibility to the poorest households; and (iii) they address specific risks or constraints to achieving the results, including long-term sustainability of the program and institutional development. 15. The Program beneficairies will be the same, namely SFB owners who need to undergo thermal renovations and boiler replacements, citizens who benefit from clearer air, equipment and service providers who benefit from increased demand for their products and services, banks who benefit from increased clientelle and loan applications and suppliers of cleaner fuel options (e.g., utilities supplying electricity, gas and district heating, biomass suppliers, etc.). C. Proposed Program Development Objective(s) 16. The Program development objectives are to save energy and reduce emissions that contribute to air pollution through the promotion and adoption of sustainable heating and energy efficiency investments in single family buildings in Poland. 17. Key Program results indicators include: a. PDO 1 (Core): Projected lifetime energy savings (MJ). The indicator measures progress towards reducing energy consumption in single family buildings through stove replacement and thermal renovations over the lifetime of the investments. b. PDO 2 (Custom): Projected lifetime reduction of particulate matter emissions (ton PM10 and PM2.5). This indicator measures progress towards reducing particulate matter emissions resulting from stove replacement and thermal renovations in single family buildings over the lifetime of the investments. D. Environmental and Social Effects 18. An Environment and Social Systems Assessment (ESSA) has been conducted as part of Program preparation. The environmental and social impacts are expected to be limited, site-specific, reversible, and mitigable. Physical works financed under the Program are under DLI 6 and 7 and include thermal insulation of buildings and replacement of old boilers by new ones of high emission class. None of the anticipated Program activities are expected to have significant irreversible adverse impacts on the environment and/or affected people. However, it is recognized that the implementing institutions will require some enhancements to their environment Nov 25, 2020 Page 7 of 10 The World Bank Poland Clean Air Through Greening Residential Heating Program (P170131) and social management systems, particularly with respect to the ex-post reviews. The environmental and social risks of the Program are rated as Moderate. 19. Potential environmental risks have been identified. Specific environmental risks identified through the ESSA relate to: (i) improper waste management due to the disposal/recycling of old boilers, old insulation materials, windows, and external doors; (ii) impacts on bat and bird habitats located under the roofs/in attics of SFBs to be retrofitted; (iii) adverse effects on houses of historical value or objects, such as tiled stoves of certain values; and (iv) health and safety of workers engaged in construction/installation works and household members during works. 20. Potential Social Risks. The potential social risks identified in ESSA relate primarily with: (a) impacts on vulnerable groups and an increase of social inequalities due to limited capabilities of low-income groups especially with regards to the online application process (DLI 2), (b) a concern that a change in fuel, from cheap firewood or coal to more expensive alternatives, may impact the recurring energy burden for lower income households, (c) the limited responsiveness of grievance redress processes, and (d) insufficient program outreach (DLI 5). With regards to CAPP procedures, the application process relies heavily upon access to technology (computers and internet), accessibility to the website, and the ability to properly fill in the application. Elderly persons not familiar with using computers and low-income households without access to internet are at greater risk of non-participation under CAPP. Agreements with municipalities to support application submission have been established and are being rolled out and expanded, to mitigate this risk. As implementation of CAPP interventions are based on voluntary application requests, it is unlikely that the CAPP will cause undue burden on lower income households as they would be less likely to request CAPP inputs. In terms of potential impacts on energy bills, the team has recommended an expansion of the current social assistance program to cover energy burdens in vulnerable SFBs, including those associated with switching to cleaner fuels, which the government is considering. Finally, a lack of consistent information throughout Poland, or incorrect information sources, may also deter participation or cause persons to make poorly informed decisions. 21. The ESSA recommends the following actions to implement an environmentally and socially sound program: (a) broadening the scope of the CAPP ex-post review to confirm adherence to environmental and social aspects; (b) preparation of an environmental and social checklist for WFOŚiGW to support the ex-post review; (c) strengthening of the existing program outreach efforts; (d) increasing the stringency of criteria under which solid fuel (i.e. coal) boilers can be supported; and (e) formalizing the role of municipalities under CAPP. Two additional actions which are suggested include: (i) establishment of an emissions registry for SFBs, which would allow municipalities in particular to better target support to low-income beneficiaries and strengthen enforcement of anti- smog resolutions; and (ii) formalization of the process by which grievances and feedback received from multiple channels is monitored, reviewed and amaglamated, which will ensure that comments received from stakeholders inform CAPP planning and implementation. E. Financing Program Financing (Template) Sources Amount % of Total (USD Million) Counterpart Funding 4,215.79 69.54 Borrower/Recipient 3,175.77 52.39 Local Beneficiaries 1,040.05 17.16 International Bank for Reconstruction and Development (IBRD) 300.00 4.95 Nov 25, 2020 Page 8 of 10 The World Bank Poland Clean Air Through Greening Residential Heating Program (P170131) Commercial Financing 1,546.35 25.51 Unguaranteed Commercial Financing 1,546.35 25.51 Total Program Financing 6,062.14 . CONTACT POINT World Bank Name : Jasneet Singh Designation : Lead Energy Specialist Role : Team Leader(ADM Responsible) Telephone No : 458-0343 Email : jsingh3@worldbank.org Name : Reena C Badiani-Magnusson Designation : Senior Economist Role : Team Leader Telephone No : 33230 / 1-20 Email : rbadiani@worldbank.org Borrower/Client/Recipient Borrower : Ministry of Finance Deputy Director, International Contact : Tomasz Skurzewski Title : Cooperation Department Telephone No : 48226945555 Email : Tomasz.Skurzewski@mf.gov.pl Implementing Agencies National Fund for Environment Implementing Protection and Water Management Agency : (NFOSiGW) Contact : Maciej Chorowski Title : President NFOSiGW Telephone No : 48224590225 Email : maciej.chorowski@nfosigw.gov.pl Nov 25, 2020 Page 9 of 10 The World Bank Poland Energy Efficiency in Single Family Buildings Program (P170131) FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects Nov 25, 2020 Page 10 of 10