The level of investment in energy efficiency required to meet climate and energy security targets is significantly higher than both the current levels, and the levels that can be financed by public capital. In order to scale up energy efficiency to the levels that we know are possible, and we know are needed, we need to change the game and make energy efficiency into something that people want to buy, and something that can be easily financed by institutional capital at scale.
The barriers to scaling up investment into energy efficiency are now well documented. To name just a few: projects are small, the methods of developing and documenting project development are not standardised, capacity within the financial sector to understand value and risks of energy efficiency is limited, and traditional business models such as Energy Performance Contracts are not attractive in many segments of the market. As Michael Eckhart of Citi said; “energy efficiency does not meet the needs of the capital markets”.
There are signs, however, that the foundations of a functioning energy efficiency financing market are now being put in place. The Investor Confidence Project is rolling out its Investor Ready Energy Efficiency™ project certification system in the US and Europe, with growing interest from India, China and Australia and New Zealand. The EU’s Energy Efficiency Financial Institutions Group (EEGIG) is soon to launch its “Value and risk appraisal framework for energy efficiency finance and investments”, a guide to under-writing energy efficiency projects in buildings and industry. Investors and lenders are expressing more interest in developing energy efficiency related products. In the US Property Assessed Clean Energy (PACE) continues to grow and PACE loans are now regularly being securitised.
To build upon these foundations we need to ensure that four components are brought together in the same place at the same time by entrepreneurial individuals and organisations. The four components are
- finance (for projects and development),
- large-scale pipelines, and
- capacity building on the demand side, the supply side and within the financial sector.
Project finance is abundantly available and much of it is seeking environmentally conscious or green homes – the issue right now is a lack of projects. Many failed energy efficiency finance schemes prove that project finance alone is not enough.
There is a need to finance the development of projects, that risky stage between “here is a good project idea” and “here is a fully developed bankable project”. Development capital is always high risk and there is an argument for using public capital to support this stage, although of course this does not generally happen in other sectors like property or power generation so it is questionable why it should in energy efficiency. The efficiency sector generally lacks a development mentality and eco-system and so public capital could be used to kick-start the development market using low cost convertible loans or grants such as the EU’s Project Development Assistance.
Standardisation in the development and documentation of projects is now available through the Investor Confidence Project. Currently available for buildings in the US, Canada and across all countries of Europe, the Investor Ready Energy Efficiency™ project certification system is there to be used. As it brings reduced due diligence costs and greater certainty of outcome, project developers, clients and financiers will increasingly require its use.
There is a lack of large-scale pipelines that can attract institutional capital. Energy efficiency projects tend to be developed on a building by building or site by site basis rather than across portfolios. In the 1980s and early 1990s large scale energy management programmes were implemented across many public and private sector portfolios but that skill and activity seems to have been lost. We are still in the pilot project mentality all too often. To develop large pipelines requires several things.
- Firstly it needs entrepreneurial efforts to acquire and build pipelines.
- Secondly, it needs attractive and simple business models that really make sense for clients. Existing models such as Energy Performance Contracts do not make sense for large parts of the market. Emerging models such as Efficiency Services Agreements, metered efficiency and Pay for Performance are more attractive and need to be developed and deployed.
- Finally, it needs strong leadership from client organisations and those that convene portfolio holders such as central, city and local governments to demand effective action at scale.
Capacity building amongst clients – the demand side – needs to focus on the energy and non-energy benefits of improved energy efficiency and the availability of financed solutions. Non-energy benefits such as increased asset value or improved health and well-being need to be stressed above just energy costs savings as they are usually much more interesting and strategic to most organisations. On the supply side capacity building needs to focus on developing standardised and bankable projects with consistent results. Within the financial industry capacity building needs to be focused on understanding the nature of efficiency, understanding the sources of value and the risks, as well as on the different ways that energy efficiency can be made into a financeable asset – all subjects covered in the EEFIG under-writing guide.
Pulling these four components together requires entrepreneurial effort – effort that can come from the public and/or private sectors – and can manifest itself in different organisational forms. Successful organisational forms include, but are not limited to, procurement frameworks, super ESCOs and retrofit accelerators. Successful procurement frameworks that can be used as models include the UK’s Carbon and Energy Fund which develops and helps finance large scale projects within the National Health Service. Through its framework it delivers finance, the pipeline, capacity building and standardisation (based on the Investor Confidence Project’s system). In the US there are several retrofit accelerators which bring together the different elements. In Dubai and India there are Super-ESCos, Etihad in Dubai and EESL in India. Both have successfully brought the four components together to deliver large-scale energy efficiency programmes and are good models for Europe and the US.
Massively scaling up investment into energy efficiency remains one of the biggest financial opportunities on the planet as well as the best opportunity to improve environmental conditions and reduce the threat from climate change. Even at current low energy prices the world spends some USD 5-6 trillion a year on energy. Entrepreneurs need to work to deliver new localised and national organisational forms that bring together the four components and deliver investment projects that significantly reduce energy spend, and bring multiple other benefits.
For more details what´s behind standardisation and risk, check Steve´s blog on "Standardisation, data and risk for energy efficiency investments"