Latest developments in energy efficiency financing
Dr. Steve Fawkes is the founder of EnergyPro Ltd which provides advisory services in energy efficiency financing and incubates new ventures. He is Senior Adviser to the Investor Confidence Project and sits on the Investment Committee of the London Energy Efficiency Fund. His blog onlyelevenpercent.com covers energy efficiency financing and related matters.
For many years the energy efficiency industry has complained of lack of finance as being a barrier – but the truth is more complex. The industry has always focused on capital cost and energy cost savings, usually expressed as payback period. It is time to move beyond this simplistic model. In the last few years the existence and value of non-energy benefits such as increased productivity, better health, increased revenues and many others has started to be recognized. The International Energy Agency estimated that non-energy benefits could be worth four times the value of energy savings. Recent work by the UK Green Building Council, Marks & Spencer and others, has looked at valuing these benefits in the retail sector. As well as financial value these non-energy benefits are much more strategic than simple energy savings, if retailers can increase sales or reduce employee turnover, those are strategic issues in way that energy savings will never be. The energy efficiency industry needs to learn to identify and value the strategic non-energy benefits in business cases for investment, whether it be internally or externally funded investment. It also needs to learn to build better business cases.
At the same time as recognition of the non-energy benefits is growing there has been a great increase in interest in energy efficiency financing from institutional investors. As part of a G20 initiative some 39 investors with Assets Under Management of over $4 trillion, backed by more than 100 banks and leasing companies, have formed the Alliance of Energy Efficiency Financing Institutions and committed to scaling up energy efficiency financing. In Europe in 2015, the Energy Efficiency Financial Institutions Group (EEFIG) published an important report on the barriers to energy efficiency financing and the group is now working with the EU and a consortium led by Cowi A/S to overcome some of those barriers – developing a project performance database and common underwriting processes. Despite this growing interest from financial institutions and policy makers so far the market remains tough and it is still a tiny niche by the standards of the financial sector. The problem is, although efficiency is often very economic (with or without the non-energy benefits), it is not yet very investable. Projects are small, there are no standard ways of developing and documenting projects, transaction costs are high and there isn’t a secondary market. Coupled with these factors is the lack of capacity within financial institutions to evaluate and assess energy efficiency projects.
So we have positive developments on the supply side – investors want to deploy capital into efficiency – and lack of capital can no longer be considered a barrier to energy efficiency, indeed there is massive liquidity in the market looking for yield that energy efficiency projects could produce. We also have developments in what I would call the infrastructure of investing – tools like the Investor Confidence Project Protocols. The Investor Confidence Project is addressing the problem of lack of standardization in project development and documentation. Working with more than 100 energy efficiency and financial organizations it has developed a suite of six Protocols and a Project Development Specification that standardize the project development and implementation process. Its system of Investor Ready Energy Efficiency™ gives investors assurance, reduces technical due diligence costs, and ensures the measurement of results. This development is welcomed by many financial institutions and project developers and the first projects embedding the Protocols are now underway across Europe and in the USA.
Now the real things that is missing in the nascent market is demand – we need more large-scale bankable projects using external finance models. Addressing that problem is now the most pressing issue in energy efficiency. I know that energy efficiency professionals will say “we have the projects” but in many cases this is more potential – there is a shortage of well-developed, standardized, large-scale, bankable projects. Energy users and other stakeholders need to devise ways of developing large-scale, multi-building or facility projects. The recently announced deal in which Current, GE’s new integrated energy services company, has signed a deal to retrofit LED lighting into 5,000 J.P. Morgan Chase & Co. bank branches, is a good example of this approach. Likewise the Etihad Super ESCO in Dubai is developing projects across multi-building portfolios, arranging finance at scale and contracting the work out to Energy Service Companies. In the US, Property Assessed Clean Energy (PACE) continues to grow strongly and over $1 billion of PACE bonds have been securitized, the first steps to creating a secondary market. These kinds of developments show the way forward.
It seems as if we are at a critical turning point in energy efficiency financing. Investors are ready to deploy capital, the infrastructure to reduce the cost of investing and ensure results is in place in the shape of the Investor Confidence Project. Building owners and the energy efficiency industry now have to deliver large-scale bankable projects.
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