From a banking perspective, energy efficiency is difficult to classify in terms of business opportunities because its benefits are so widely dispersed, writes Stephen Hibbert, global head of Energy & Carbon Efficiency at ING Wholesale Banking. For this reason, to close the “investment gap” in energy efficiency, “a historic level of public-private cooperation” is needed, according to Hibbert. He sees many signs that this is happening.
Back in 2013, I was approached to join a group convened by the United Nations Environment Program Finance Initiative (UNEP FI) and the European Commission’s Directorate-General for Energy: the Energy Efficiency Financial Institutions Group (EEFIG). Their remit was to identify ways to scale up energy efficiency financing so that the potential of this market can finally be unleashed. At ING we like to think we are quite forward thinking in our approach to financing the low-carbon transition, but the EEFIG experience has taught us a lot that we didn’t know.
ING is not a development bank like the European Investment Bank (EIB) or the European Bank for Reconstruction and Development (EBRD) so we will only lend when projects are investment-ready
To put some numbers on it, energy efficiency can deliver about a third of the reduction in carbon emissions needed to meet the targets set out in the Paris Agreement, and save costs at the same time. About $1.2 trillion a year needs to be invested, which is triple the current levels, according to the UN SE4All Global Tracking Framework, and most of it will need to come from the private sector. Looking at the investment gap in energy efficiency in Europe’s buildings, for example, only half of the estimated €60 – 100 billion annual investment required to achieve Europe’s 2020 energy efficiency targets in buildings is being met.
From ING’s perspective, while energy efficiency is something all our client groups do, it is not easy to classify it within the organisational structure of a bank in terms of future business opportunities. The range of energy efficiency’s impacts means that it cuts across the activities of traditional sector lending and product teams, affecting areas ranging from buildings, infrastructure, to industry services. However, it is rarely a core business or the main driver of investments for any of them. And precisely because the benefits are so widely dispersed, it can be difficult to build and ring-fence a single, cohesive business case.
Risk of penalties
These, along with other barriers, hinder investments in energy efficiency. To mobilise significant investment at scale, close cooperation between private sector banks, the public development banks and policymakers is essential. It’s an approach that was very successful in financing the reconstruction of central and eastern European countries after the collapse of the Soviet Union, so there is certainly a precedent for it.
Encouragingly, we see that the market and policy makers are now beginning to work in tandem.
In Europe, the main policy drivers include the introduction of the EU’s Energy Efficiency Directive in 2012 and the subsequent implementation of National Energy Efficiency Action Plans from 2014, which present both opportunities and risks to a wide range of our clients.
Alongside new business development opportunities, there are the costs of having to make extra investments to comply with the directive and the risk of penalties for not doing so. There’s a massive investment gap that needs to be filled if governments are to achieve their long-term energy and climate commitments, which we at ING regard as a significant market opportunity. However, ING is not a development bank like the European Investment Bank (EIB) or the European Bank for Reconstruction and Development (EBRD) so we will only lend when projects are investment-ready.
Public funding has proved to be most effective when it includes technical assistance, also known as project development assistance. This additional funding, which is available from the European Commission, supports project promoters to develop sustainable energy projects to a point where they are investment-ready. The key difference from traditional grant funding is that this is a form of ‘blended finance’, where the public funds are provided on the condition that further investment is leveraged – typically ratios in the range of 1:15 – 1:20 of public grants to private investment.
To give a concrete example of how public-private cooperation in enabling sustainable energy investments is beginning to manifest, a project supported by the European Commission’s JESSICA (Joint European Support for Sustainable Investment in City Areas) initiative had 70% of its total costs funded by a non-recourse project finance loan from ING.
The project, Nature’s Heat, is a direct use geothermal heat project comprising a 2.5km deep geothermal doublet (production well & injection well) and a heat processing and distribution network, expected to deliver 16MWth heat to be used by its owners, a consortium of glasshouse horticulture businesses near The Hague in the Netherlands.
The growers expect to save 25% or more on heat costs compared with the current alternative supply from gas-fired boilers. Nature’s Heat will avoid the use of some 22 million m3 natural gas per year for at least 30 years, with a corresponding annual reduction in greenhouse gas emissions of 40,000 tonnes CO2 and 7,200 tonnes NOx. In addition the resulting competitive advantage and business resilience for the horticulture businesses will support job security and maintain social cohesion in the local community.
The banking sector must gain a much deeper understanding of the full range of issues and what is driving the needs of our clients and policymakers
Alongside the equity investment from its owners and the project finance loan from ING, Nature’s Heat benefits from a subordinated loan from Energy Fund Den Haag (ED). ED is funded 40% by the European Regional Development Fund (ERDF) and the remaining 60% comes from the Government of the Netherlands, the Province of South Holland and the Municipality of The Hague. The Nature’s Heat project financing is a fine example of public-private cooperation at all levels.
Another example of public-private cooperation is the Investor Confidence Project, originated by the US Environmental Defense Fund and funded by the European Commission to roll out to Europe, to provide a markets-based solution to accelerate investment into energy efficiency by standardising how projects are developed, documented and measured.
I have represented ING on the project’s European steering group since 2014. During this time, I have witnessed increased engagement of the financial sector both in Europe and in North America through the project’s Investor Networks, with assets under management of €1 billion and $3 billion respectively – a clear signal that the standardisation necessary to enable energy efficiency investment is welcomed by the market.
Public-private cooperation is further supported by the Sustainable Energy Investment Forums (SEI Forums). These Forums, initiated in 2016 by the European Commission’s Executive Agency for Small and Medium-sized Enterprises (EASME), aim to boost large-scale investment and facilitate financing for energy efficiency across Europe.
Through a series of public events and national roundtables in the Member States, SEI Forums showcase the insights and experience gained in the past few years from EEFIG, ICP and other projects, to policymakers, project developers, fund managers, and investors. With a new shared understanding and common language, I anticipate that SEI Forums will succeed in creating a multi-stakeholder platform for proposing the necessary changes to policy and regulatory frameworks at national level throughout Europe.
Looking to the future
The role of the corporate world in climate action has become increasingly important in recent years. Many businesses have called on governments, both national and regional, to introduce carbon pricing to place a cost on greenhouse gas emissions high enough to change behaviour and reduce emissions. To meet their targets, governments will have to make other changes, too, introducing new policies and regulations. Meanwhile, companies are stepping up their own ambitions on cutting emissions in their own operations and their supply chains through initiatives such as the We Mean Business coalition and the Science-Based Targets initiative.
The banking sector must gain a much deeper understanding of the full range of issues and what is driving the needs of our clients and policy makers. It must engage more and better explain our own position, as well as our concerns in relation to providing the finance necessary for transition to a low carbon society.
Witnessing the increasing momentum towards mass scale energy efficiency investment, I confidently predict that over the next two to three years, energy efficiency will rise ever higher up the corporate investment agenda and become more of a mainstream financing activity. It’s definitely here to stay.
Stephen Hibbert is global head of Energy & Carbon Efficiency at ING Wholesale Banking, chair of the Climate Finance Forum of the Climate Markets & Investment Association (CMIA) and represents ING on the Banking Commission of the United Nations Environment Programme Finance Initiative (UNEP FI).