Across Europe and beyond, billions of euro of public finance are being committed to energy efficiency. According to the International Energy Agency, private investors and lenders are also ‘increasingly interested’ in investing in energy efficiency. Key drivers include ever-tightening legislation along with a host of well-established co-benefits – increased energy security, better air quality, reduced fuel poverty and job creation. The European Commission puts the size of the investment required for building energy efficiency retrofits to meet their climate and energy goals at around €100 billion per year[i]. And yet the market is fragmented, characterised by high transaction costs and unpredictable savings and has yet to take off.
Is investor confidence the key to unlocking the potential of the world’s ‘first fuel’?
Follow the money
In theory, it’s never been so easy to access finance for energy efficiency. Germany’s public investment bank, KfW, committed a total of EUR 16 billion to energy efficiency in 2013, and the European Investment Bank (EIB) provided EUR 2.1 billion across the European Union. France’s Caisse des Dépôts committed EUR 453 million to energy efficiency in 2012 and the United Kingdom Green Investment Bank provided EUR 181 million. Green investment banks are also being established (and have energy efficiency as a target sector) in Malaysia, South Africa, Australia, Japan, the United Arab Emirates and the United States. Many energy efficiency funds exist at national and regional level across Europe and are set to be boosted by a whopping EUR 38 billion via the European Structural and Investment Funds allocation to the low carbon economy between 2014 and 2020. In 2012, global energy efficiency investments across all sectors totaled $310 billion representing a very significant and growing market opportunity for investors and businesses.
Leading financial institutions are increasingly aware of the opportunities. According to Urs Rohner, Chairman of Credit Suisse Group AG, “Our research demonstrated that Europe can probably save another 10 to 15% of energy by 2030 with appropriate energy efficiency measures with no negative impact on economic growth. We therefore believe that more efficient energy will have double benefits, to Europe’s environmental and economic growth targets.”
And yet despite this promise, on the ground the market seems to be somewhat… sluggish.
Establishing a bankable project pipeline has often proved challenging – even for ‘role model’ fund eeef (European Energy Efficiency Fund, the acronym is pronounced ‘triple-e-f’) targeting the public sector. Peter Coveliers, Chairman of the Management Board said: ‘2012 was characterized by building up a sustainable pipeline and closure of its first transactions’, with the most recent annual report stating that ‘projects in this field are developing at a moderate pace’.
According to Ingrid Holmes of independent environmental organization E3G, ‘These are consistent issues with energy efficiency funds in the public and private sectors. It’s easy to raise the money – but hard to find the bankable projects. The barriers are on supply, not demand.’
And Tristan Oliver from the project development unit at RE:FIT (UK national public sector ESCO program) echoes this sentiment, saying ‘This is not an easy thing to do. You have to do a lot of work and really encourage the public sector to make it work. Our clients don’t yet have the confidence, knowledge or experience to undertake energy performance contracts – they don’t just walk in the door, we have to go out and find them.’
Building Investor Confidence
Confidence is the watchword here. Two years ago the United Nations Environment Program and the European Commission convened the Energy Efficiency Financial Institutions Group (EEFIG) to look at the barriers to energy efficiency investment, with rapporteur Peter Sweatman at the helm. EEFIG counts heavy hitters such as BNP Paribas, Deutsche Bank, ING, KfW, Société Générale, the EIB, and EBRD among its members.
EEFIG succeeded in building the consensus across a group of 120 experts representing major financial institutions, policymakers, industry, and civil society and published the group’s findings in two EEFIG reports on how to drive new finance for energy efficiency investments for buildings, industry and SMEs.
A leading conclusion from the EEFIG is the necessity to build investor confidence in energy efficiency. And how? Through the ’launch of an EU-wide initiative to develop a common set of procedures and standards for energy efficiency and buildings refurbishment underwriting for both debt and equity investments’ according to the report.
“Given that energy efficiency contributes 49% of global greenhouse gas emissions reduction, boosting investor confidence at this stage is critical” said EEFIG rapporteur Peter Sweatman.
A Global Asset Class
Five years ago, the NGO Environmental Defense Fund originated the Investor Confidence Project to contribute to market development for energy efficiency renovation projects by streamlining transactions and increasing the reliability of projected energy savings. The intention: to build a marketplace for standardized energy efficiency projects. The idea is that individual projects can then be aggregated and traded by institutional investors on secondary markets – just like mortgages or other profitable asset-backed securities.
The ICP system is also gaining significant traction in the United States with state and local energy efficiency programs and individual building efficiency projects. For example, the Building Owners and Managers Association (BOMA) International recently announced the relaunch of its BOMA Energy Performance Toolkit based on the ICP standards.
ICP Europe, led in part by Senior Advisor Dr Steven Fawkes, launched earlier this year. Already the ICP Europe project consortium is attracting political and financial support, including EUR 1,92 million from the European Commission’s Horizon 2020 programme.
Fawkes certainly knows his stuff – he’s a member of the Investment Committee of the London Energy Efficiency Fund and comes with 30 years’ experience of energy efficiency, including founding two energy service companies.
“Governments and NGOs have for years been talking about how energy-efficiency is the low hanging fruit, often bringing a healthy return on investment,” says Steven. “But, despite the actions of a few market leaders such as M&S, investing in it is clearly not as easy as it’s made out to be, otherwise everybody would be at it. We want to change that. We want to make it become an indispensable part of every institutional investor’s portfolio.”
On 14 September ICP Europe released its first draft Protocols on large tertiary (non-domestic) buildings and standard tertiary buildings for review. The ICP Europe Protocols are an industry best practice assembly of existing European and national building energy renovation standards, practices, and documentation aligned to create the data necessary to enable underwriting and managing of energy performance risk. The protocols are open-source and can be used by anybody in the market at no cost.
Until 2 October, ICP Europe is looking for feedback on the first draft protocols. Stakeholders are invited to contribute through the Technical Forum and to participate in unlocking the potential of energy efficiency as a global asset class by joining the ICP Europe Ally Network.
The new black
Speaking at Horizon 2020 Energy Info Day last Monday, Paul Hodson, the most senior official on energy efficiency at the European Commission, quoted Günther Oettinger as saying that energy efficiency is “a Sunday morning philosophy” – meaning more preached that practiced. Marie Donnelly, director for energy transition at the European Commission once said that energy efficiency is like motherhood and apple pie – everyone thinks it’s a good idea but no one agrees on what’s best.
Panama Bartholomy, ICP Europe Director, points out:
“Now there is a clear consensus from the EEFIG on what’s best – or most needed – to tackle the energy efficiency challenge. With the release of the first protocols, ICP Europe is on the way to unlocking massive scale investment in Europe’s building stock. In 2012, global energy efficiency investments across all sectors totalled $310 billion. Following the money of this scale will make energy efficiency the new black.”
The Investor Confidence Project Europe welcomes all organisations interested in building an investable energy efficiency marketplace to join their Technical Forum to help develop European-wide project development and underwriting process. To sign up go to this link: http://europe.eeperformance.org/technical-forum.html