American way of financing energy efficiency projects could lead to breakthrough in Europe

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retrofitting (photo province of British Columbia)

retrofitting (photo province of British Columbia)

A retrofit project of the National Health Service (NHS) in the UK is the first in Europe to sign up to a new energy efficiency accreditation scheme, imported from the United States. This Investor Ready Energy Efficiency (IREE) certification gives investors and financial institutions guarantees that a project is environmentally and financially sound. It could pave the way for a huge expansion of energy efficiency projects across Europe: “the IREE represents the beginning of the creation of a recognisable standard investment class.”

A joint retrofit project carried out by a consortium of three National Health Service (NHS) Trusts in Liverpool has become the first in Europe to receive the Investor Ready Energy Efficiency (IREE) certification.

Launched on 30 June 2016 by the Environmental Defense Fund’s Investor Confidence Project (ICP) Europe, the IREE certification for commercial and multifamily residential buildings is granted to projects that follow ICP’s framework, and thereby provide investors with more confidence in financial and environmental results. ICP Europe is funded by the European Commission’s Horizon 2020 programme.

Developed by the Carbon and Energy Fund, the £13 million NHS retrofit project is predicted to achieve annual savings of £1.85 million over the fifteen-year span of the energy performance contract. Even by the standard of the NHS, a UK leader in ambitious retrofitting projects, this represents financial and energy savings on an impressive scale. Set to be the first of many accredited by ICP in Europe, this project will contribute to paving the way towards an expansion of the market in energy efficiency renovation projects. The ICP accreditation aims at increasing the bankability of these projects through the medium of more streamlined transactions and increased reliability of projected energy savings for investors.

At the moment, the market in Europe is not big enough to go down the refinancing and securitisation route

The energy efficiency market already employs more than around 136,000 people in the UK, is worth more than £18 billion annually, and delivers exports valued at nearly £1.9 billion per year. The UK’s commercial retrofit market potential is estimated at a further £9.7 billion.

Project investors in the Liverpool Energy Collaboration, Macquarie Group, stated: “Macquarie is pleased to support the NHS energy efficiency upgrade project in Liverpool. We look forward to financing future energy efficiency projects as the UK transitions to a clean, low-carbon economy.”

Opening up market potential

As it expands, ICP’s Investor Ready Energy Efficiency certification could point the way toward mass-scale financing of energy efficiency in the building sector – where €100 billion per year is needed to reach the EU’s 2020 energy efficiency target. The recently launched Investor Network has brought together investors with €1 billion in assets under management looking for energy efficiency opportunities.

Steven Fawkes, senior enerqy advisor to ICP Europe, sees this project as a significant first step. “We are working on certifying 18 projects and programmes in five European countries, ranging from retrofitting swimming pool dehumidifier systems in Portugal to the deep energy retrofit of a 2000 m2 student accommodation complex in Germany.”

ICP Europe itself is an offshoot of the Investor Confidence Project in the US, launched five years ago (by the Environmental Defense Fund), which has been accrediting an array of projects there, from an apartment block in California to a church in Connecticut, which expects to save $44,000 a year in energy bills.

The smallest project that investors would consider viable for refinancing would be a £200 million one

Fawkes explains the longer term aims of ICP Europe: “We are building a standard asset class. For financial institutions the value is twofold. Firstly, there is a reduced due diligence cost (they can be confident that the project is developed to a high standard). Secondly, it will be helpful when aiming to aggregate projects and issue green bonds.” He explains that, at the moment, the market in Europe is not big enough to go down the refinancing and securitisation route.

When it comes to the potential for aggregation and refinancing, the requirement for ongoing measurement and verification is very important to prove that energy is being saved. However, according to Fawkes, the smallest project that investors would consider viable for refinancing would be a £200 million one. At least the IREE represents the “beginning of the creation of a recognisable standard investment class.”

EU collaboration

The Energy Efficiency Financial Institutions Group (EEFIG) was convened three years ago by the United Nations Environment Program and the European Commission to examine barriers to investment in energy efficiency. EEFIG is working with ICP Europe on a derisking project with two main functions: building a database of energy efficiency project performance so that investors can look at the performance of certain projects, and the development of a guide to standardised underwriting procedures for financial institutions.

Fawkes points out that “when the European Commission’s DG Energy publishes this guide next year, financial institutions will sign up to use it, giving added value to the IREE standards, which will be incorporated in it.”

Interested parties are invited to contribute to ICP Europe’s efforts through the Technical Forum and help make energy efficiency a global asset class by joining the ICP Europe Ally Network.

Comments

  1. says

    The Uk gov’ can raise money at around 0.25 – 0.5%. This raises a very important question: why is it not funding these projects itself – why use a (non-UK) company such as Macquarie Group who may well also be “optimising” its tax situation vis-a-vis the UK. I’d suggest that the reason it “look(s) forward to financing future energy efficiency projects as the UK” is because these are highly profitable. Expressed another way – benefits from the project flow to a private company – when, had the project been funded by the UK gov’, (who in any case owns much of the NHS estate) the savings, accruing to the UK gov, would be much greater.

    There is something truly perverse about this financial set up, a gov’ that could afford to fund low risk projects covering properties it owns, instead lets a non-UK company pick up a pile of cash, for what? I am on record as saying that I regard the UK, its government and institutions as one of the most corrupt on earth. I’d suggest this “financial arrangement” is one example of intellectual corruption – the inability of governments generally and the UK in particular to fund low risk projects directly, said projects directly saving said gov money on its own property. Incredible – you could not make it up.

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