Energy efficiency remains one of the most intractable transition challenges. There are now finally plenty of funds available, yet progress remains slow. To overcome the last hurdles, major new initiatves have started up aiming to standardise energy efficiency processes to make it easier to invest in them. One of these is the Investor Confidence Project (ECP), originated by the Environmental Defense Fund. Goal: to turn energy efficiency projects into an asset class, which will make it possible for investors to invest in them on a massive scale.
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 being established (and have energy efficiency as a target sector) in the United Kingdom, Malaysia, South Africa, Australia, Japan, the United Arab Emirates and the United States. Dozens of 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.
Our clients don’t just walk in the door, we have to go out and find them
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. The most recent annual report from eeef states that ‘projects in this field are developing at a moderate pace’.
According to Ingrid Holmes of independent environmental organisation 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.’
We want to make energy efficiency a standardised product and then an indispensable part of every institutional investor’s portfolio
Nonetheless, there are glimpses of the huge potential of the market. Diputació de Barcelona (Council of Barcelona Province) developed the first mass-scale energy services company (ESCO) model in Spain. The project REDIBA (Renewables and energy efficiency in Barcelona Province) was kick-started with project development assistance of EUR 2 million from the European Investment Bank. It has now realised EUR 100 million in investments, mostly through improved energy efficiency in public sector buildings. According to Albert Vendrell Roca, ‘The energy saving potential in the public sector is very, very high. Other municipalities can see where projects have been successful and then they ask for them to be done in their areas. But there is a danger that small and medium municipalities are left by the wayside. Financing alone is not enough at the end of the day. Municipalities really need coaching and advice throughout the whole process.’
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.’
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, and engaged Peter Sweatman as rapporteur. EEFIG counts heavy hitters such as BNP Paribas, Deutsche Bank, ING, KfW, Société Générale, the EIB, and EBRD among its members. High level supporters include European Commission Vice President, Maroš Šefčovič, UK Energy and Climate Change Secretary Ed Davey, and Felipe Calderón, Former President of Mexico.
“Never before have so many large and small, public and private investors come together to discuss how to find ways to give us the financing we need to meet our building renovation goals”
Sweatman succeeded in building 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.
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 Sweatman.
A global asset class
Five years ago, NGO Environmental Defense Fund originated a project that attempts to do exactly that: the Investor Confidence Project (ICP) aims to make energy efficiency renovation projects bankable by streamlining transactions and increasing the reliability of projected energy savings. The ultimate intention is to build a marketplace for standardised 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 asset-backed securities.
Already ICP has gained traction in the US through inclusion in federal and bank lending programs, and this summer the Building Owners and Managers Association (BOMA) International announced the relaunch of its BOMA Energy Performance toolkit based on the ICP standards.
The Investor Confidence Project Europe (@icpeurope) 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. 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. To sign up go to this link: http://europe.eeperformance.org/technical-forum.html
ICP Europe launched earlier this year, funded by EUR 1.92 million from the European Commission’s Horizon 2020 programme. Dr. Steven Fawkes is a senior advisor to the ICP Europe project.
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, which can bring a healthy return on investment,” says Fawkes. “But, despite the actions of a few market leaders such as M&S, investing in it is not as easy as it’s made out to be, otherwise everybody would be doing it. We want to change that. We want to make it become a standardised product and then 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.
Panama Bartholomy, ICP Europe Director, notes: “Never before have so many large and small, public and private investors come together to discuss how to find ways to give us the financing we need to meet our building renovation goals. Their message was crystal clear: the lack of a standardised process for developing and underwriting projects was the consensus top barrier inhibiting their confidence in our industry. What we are now doing is bringing together the owners, financiers, engineers and governments to develop exactly that process. The financiers have finally made a clear ask, how will we respond?”
Within the ICP Europe team, the mood is similar to that of an IT start-up – global ambition and wild enthusiasm. ‘This is audacious. This is market transformation we’re going for,’ said Bartholomy.