With rising GDP, the European Union is once again at risk of missing the 2020 targets for energy efficiency, and yet more ambitious targets for 2030 lie ahead. Regulation, especially for energy efficiency in buildings, is already driving demand, according to the European Investment Bank, with commercial banks acting as aggregators. Peter Sweatman, rapporteur of the Energy Efficiency Financial Institutions Group is optimistic on the future prospects for energy efficiency investment as a cornerstone of sustainable finance. “Energy efficiency will no longer struggle to attract financing. Instead, mainstream financiers will proactively seek it out,” says Sweatman.
To meet the European Union’s 2020 energy efficiency target, final and primary energy consumption must fall by 0.5% and 1.0% per year, respectively, between 2016 and 2020. However, over the two years prior to 2016, final energy consumption grew by more than 4% and primary energy consumption was up by more than 2%. Early indications suggest another increase in 2017.
Energy efficiency is identified as the largest single player in delivering both a carbon neutral economy in Europe by 2050, and the Paris Agreement, where energy efficiency actions account for a 44% share of the greenhouse gas reductions required. But with only a year left to go until 2020, it is now up to the market to deliver, if the target is to be met.
The European Investment Bank (EIB) is the world’s largest multilateral financier of climate action projects, with 30% of its lending going towards combating climate change in 2018. Overall, the EIB’s energy efficiency lending has increased threefold since 2012, and in 2016, 74% of the €3.62 billion total energy efficiency lending was allocated to buildings.
Ralf Goldmann, Head of Division, Energy Efficiency Projects Directorate at the EIB, explains the reasons for these changes: “Firstly, you have to understand that this is proportional to overall EIB lending, a relatively stable fraction of which goes to energy. 2016 saw the highest volume of EIB lending ever (at €84 billion), and then of course over the last seven years there has been a shift away from financing ‘traditional’ energy towards energy efficiency and renewables.”
This shift was in part due to the bank’s new lending criteria in 2013. Another energy lending review is now underway, with industry, civil society groups and policymakers invited to contribute to a three-month public consultation which closes on 29 March 2019.
“The world changes and policy with it, so we have to follow,” says Goldmann. “For example, in 2013, the recast Energy Performance of Buildings Directive (EPBD) brought in nearly-zero energy buildings (NZEBs) and cost optimality of building renovations. And we have seen that, following the EPBD recast, energy efficiency in buildings has become a bigger policy issue for Member States, and so the market is moving. The big jump in lending that you see [in 2015 to energy efficiency in buildings] is essentially the result of a policy shift.”
Another EU policy driver (via the EPBD) requires Member States to draw up plans for renovating their building stock. Goldmann says: ““Hopefully national renovation strategies will increase demand, and if these are designed properly and use Structural Funds intelligently, then we could see a real sea change here.”
The role of market players is also changing, with a key EIB funding line, ELENA (European Local Energy Assistance) now open to private sector organisations, including banks. Since 2009, ELENA has provided €154 million of grants for efficiency, renewables and transport projects, triggering an additional €5.4 billion of investment. ELENA grants can be used to finance costs related to feasibility and market studies, programme structuring, business plans, energy audits and financial structuring, as well as to the preparation of tendering procedures, contractual arrangements and project implementation units.
Goldmann comments: “For energy efficiency in buildings, there’s a lot of individual decisions from homeowners and housing associations involved and here you have to find aggregators. Increasingly we are seeing commercial banks moving into this role, of aggregating demand, and we are providing the technical assistance necessary to help them set up energy efficiency financing teams.”
Along with increasing the availability of finance, the International Energy Agency (IEA)’s latest Energy Efficiency report highlighted the need for new business models for energy efficiency. Name-checked in the IEA report as a ‘market enabler’, the eQuad platform is providing a matchmaking service between energy efficiency projects and investors. Developed by Joule Assets Europe, and launched in Q2 2018, eQuad achieved a project pipeline of over €160 million in its second quarter of operation.
“eQuad has exceeded our expectations in terms of volume of opportunity, and even more than that, in terms of the challenges those opportunities face in actually getting financed,” says Jessica Stromback, Chair of Joule Assets Europe. “In that context the necessity of the support eQuad provides is simply confirmed. And on our side we continue with our central premise – finance should not be allowed to stand in the way of viable projects.”
In response, Joule Assets Europe decided to provide financing solutions and strategic support for ‘Energy Reduction Assets’, including energy efficiency, distributed renewables, storage, and building control measures. The online platform, eQuad, provides access to third-party project valuation, performance insurance, project certification, due diligence, and introductions to prequalified capital sources in the form of off-balance sheet financing. The work of eQuad is carried out by Joule Assets Europe, in partnership with ICP (Investor Confidence Project) Credentialed Quality Assurance Provider, and internationally recognized insurance provider, HSB Engineering Insurance Ltd.
eQuad is open to projects of all sizes – this can be very small, from well below the €100k range, to in the several millions. Stromback says: “In general, for one of the smaller projects to get financed, it should be bundled in a portfolio, usually of at least a million, of similar small projects, that the Energy Service Company (ESCO) is selling using the same, standard contract. For these smaller projects, the more repeatable they are in terms of client/building type, Energy Conservation Measures (ECMs) used, and the ESCO-client contract, the easier it will be to sell to an investor as a package.”
Participating in the European Commission’s Sustainable Energy Investment Forums has been instrumental for the success of the project, according to Caroline Milne, Communications Director of Joule Assets Europe. “It has helped us get to know local energy efficiency markets and local actors. It has also shown us that, while each market has its own specificities (whether legislative, related to buildings or other), most Member States are facing similar issues in increasing demand for energy efficiency by end users, and in transforming energy efficiency into a product/service that people want to invest in.”
Indeed, making energy efficiency something that people want to invest in is central to the mission of the third phase of the Energy Efficiency Financial Institutions Group (EEFIG), an initiative established in 2013 by the European Commission Directorate-General for Energy (DG Energy) and United Nations Environment Program Finance Initiative (UNEP FI).
“Energy efficiency needs to be ‘productised’ by entities which deal with hundreds of millions of clients – by choice and through prudential regulation,” says Peter Sweatman, EEFIG rapporteur and the task group lead for G20 on energy efficiency finance. “Some of these entities are already represented in the EEFIG, bringing together policymakers and organisations which deliver finance.”
Entering its third phase, in 2019, EEFIG will be recruiting for more financial institutions to work together to explore how energy efficiency intersects with green finance. Sweatman is optimistic. “As we have seen across multiple industries, when a component becomes a standard, it enters the mainstream and its cost is reduced dramatically through economies of scale and markets and supply chains adjust accordingly,” he says. “As a standard component in the taxonomy of financial products, energy efficiency will no longer struggle to attract financing. Instead, mainstream financiers will proactively seek it out.”