Slovakia’s REPowerEU chapter is delivering, but focus needs to shift from big business to social organisations

Slovakia’s recovery and resilience plan was initially allocated EUR 6.3 billion, to be used starting in 2021. However, due to the growth of the country’s gross domestic product (GDP), the allocation was decreased by EUR 323 million. But the introduction of the new REPowerEU chapter has resulted in an increase of EUR 403 million, partially financed by the Brexit Adjustment Reserve.

The Slovak government engaged in internal discussions from summer 2022 to spring 2023 to determine how to adjust the recovery plan’s components in light of the original decreased allocation, significant inflation, and emerging challenges associated with phasing out Russian fuels. Unfortunately, the involvement of non-governmental organisations in the discussions occurred in the later stages after November 2022, which limited their opportunities to contribute to the improvement of the texts.

Disappointingly, the government also ignored the opportunity to secure favourable loans from the Recovery and Resilience Facility, instead prioritising the distribution of grants to large companies. As a result, not enough funds have been allocated for the renovation of social facilities, such as those for older people, crisis centres, shelters and pre-schools. Regrettably, the Slovak government has also showed zero ambition in transforming the district heating sector. But despite these setbacks, REPowerEU has helped Slovakia make strides in enhancing support for socially vulnerable households through initiatives such as the Renovate House scheme.

Building and energy support going in the right direction, but traps lie ahead

Slovakia’s recovery plan includes a generous allocation of EUR 2.7 billion for public buildings (including renovation) across various components. Unfortunately, the plan also includes support, albeit limited, for fossil gas boilers. Although this is compliant with the guidance on the application of the ‘do no significant harm’ principle, it only delays tackling the decarbonisation of heating sources.

On a positive note, Slovakia has effectively used REPowerEU to top up financing for energy poverty, specifically for energy efficiency and renewable energy projects, . This means that socially vulnerable households are not required to co-finance the costs associated with window replacements, home insulation or adopting renewable energy sources. This approach enables targeted support from EU funds, aligning with socially conscious objectives. The REPowerEU chapter will also be used to provide additional support to citizens for energy projects – such as financing for and project support for house renovation – which would greatly benefit socially vulnerable households.

Unfortunately, the Slovak government lacks a comprehensive plan for phasing out fossil fuels in the heating or district heating sectors. To address this issue, it is crucial for the Ministry of Economy to take the initiative and lead a reform of the heating sector, integrating building renovation with the modernisation of the heating sector to facilitate the transition to decarbonised low-temperature systems.

Although the first reform of the Slovak REPowerEU chapter mentions support for low-carbon hydrogen, it’s important to consider that promoting low-carbon hydrogen derived from nuclear power or even partially from fossil gas makes it economically and politically unwise. Such an approach contradicts the objectives of REPowerEU and the promotion of renewable energy sources. Slovakia is still 100 per cent dependent on uranium imports from Russia to fuel its nuclear power plants, and in 2022, it imported up to 60 per cent of its fossil gas from Russia. In addition, hydrogen from renewable sources should be used for hard-to-abate sectors only and not for heating, as it is six times less efficient than heat pumps.

Grants or loans for renewable energy?

In April 2021, the Slovak government approved a support package of EUR 232 million for renewable energy auctions. The Ministry of Economy then opened the first call for proposals between May and July 2022. Electricity prices were so high in 2022 that many companies in Slovakia financed solar installations out of their own pockets to reduce their energy costs and increase energy security.

The first component of the recovery plan provides funding for 45 to 60 per cent of the costs associated with renewable energy installations. This support may seem highly efficient, as financial assistance is granted to power plants expected to produce the highest amount of renewable electricity per euro. However, the situation is much more complex than it seems.

In March 2023, the Ministry of Economy approved grants totalling more than EUR 20 million to 58 companies. Interestingly, half of the grant recipients were capable of covering these costs from their profits in just one year (2021). The payback period for photovoltaic (PV) installations varies greatly, ranging from 7 years (during the period of high electricity prices in 2022) to 16 years (a conservative estimate for rooftop solar installations), while the lifespan of PV systems generally exceeds 20 years.

How can the government incentivise large companies to invest in photovoltaics?

Public funds should encourage profitable companies to invest a portion of their profits. Photovoltaics are a very low-hanging fruit for large companies. With favourable loans, these companies would be able to invest more effectively, leading to greater sustainability.

Moreover, the REPowerEU chapter includes the investment ‘Modernisation and digitalisation of the transmission and distribution systems’, which has an allocation of EUR 129 million until 2026. However, distribution companies (DSOs) would be able to pay this amount from their one-year profits (EUR 159 million in 2021). Slovakia is also a shareholder in all of these DSOs.

We are facing multiple crises at once, ranging from energy, war and migration to climate change. For these reasons, we cannot afford to subsidise companies whose profits amount to tens of millions of euro annually.

By comparison, ‘Investment 2: Improvement of energy performance and efficiency of state buildings (“Fast Measures”)’ has a relatively small allocation of EUR 20.42 million. The National Implementation and Coordination Authority has expanded the beneficiaries to include municipalities. But non-profit organisations, civic associations, and foundations are notable for their absence. Such a small allocation does not cover the needs of organisations active in the social field.

Social organisations need support for ‘quick action’

In March 2023, 66 social sector organisations, primarily social service providers, completed a questionnaire on the impact of the energy crisis. Twenty-six respondents estimated that they could use more than EUR 13 million in total. They expressed interest in implementing energy-saving measures and renewable energy solutions in 150 out of the 192 buildings where they provide their services, accounting for 78 per cent of the surveyed buildings. There are more than 1,300 facilities in Slovakia. The overall need for so-called ‘quick savings’ measures in this sector can be very roughly and conservatively estimated at over EUR 120 million.

The energy bills for the 66 respondents have increased by an average of 125 per cent. Out of these, 25 (41 per cent) were ineligible for compensation for the increased energy prices, and seven reported only partial opportunities for compensation. However, 29 respondents were eligible for compensation from the government. Social organisations mostly specified a preference for the installation of photovoltaics, new energy-saving LED lights and the introduction of energy management, but expressed negligible interest in biomass boilers.

More detailed results of the questionnaire analysis can be found in the full publication.

Also, social non-governmental organisations and municipalities significantly helped the state during the humanitarian crisis at the beginning of Russia’s military aggression in Ukraine. Before that, they were fundamentally affected by the COVID-19 pandemic. For these reasons, the state administration should not forget to support all of the organisations that help socially vulnerable people.

Moreover, Slovakia has the lowest share of wind and solar energy in the EU, according to comprehensive data from EMBER. This is an unfortunate legacy of previous governments. Slovak ministries need to combine grants with loans to catch up with the rest of the EU.

Lastly, the projected costs for implementing the 55 per cent decarbonisation target by 2030 in Slovakia are EUR 2.7 billion, and EUR 5 billion for a 67 per cent decrease in greenhouse gases. However, decarbonisation costs will rise to more than EUR 100 billion by 2040 and by more than another EUR 100 billion by 2050 due to more complex measures. To put these figures in context, Slovakia currently has about EUR 6 billion until 2030. Therefore, the new government must understand that to achieve climate neutrality, loans are necessary and the share of grants must decrease. This is especially true for large companies.   

It would be highly beneficial if the European Commission and the Slovak government took the initiative to incentivise and motivate ministries and state agencies to:

• properly phase out all support for fossil gas;
• re-evaluate support for low-carbon hydrogen;
• commence discussions about the transformation of district heating;
• gradually replace grant support with favourable loans for renewables from large companies;
• prepare special grants for social organisations.

By implementing these measures, both the European Commission and the Slovak government can play a key role in promoting sustainable energy practices and using EU funds more effectively, targeting first those that have the most pressing needs.