Energy efficiency experts have come to the conclusion that “selling the business case of energy efficiency on the basis of cost savings is not enough.” If the potential of energy efficiency is to be realised, a real marketplace in projects needs to be built and the “non-energy benefits” of efficiency must be monetised writes Brussels-based journalist Clare Taylor. The European Commission has developed a number of instruments, including a unique database, to enable the financial community to better assess the value of projects.
It is no secret that energy efficiency is the great underachiever in climate policy instruments. The EU, for example, has a 2030 investment gap in energy efficient buildings of around €100 billion per year.
The latest Energy Efficiency market outlook report from the International Energy Agency (IEA) also strikes a familiar note. It shows that “the right efficiency policies could alone enable the world to achieve more than 40% of the emissions cuts needed to reach its climate goals without requiring new technology”, but – you guessed it – “investment is not currently on track to achieve this goal”.
Energy efficiency’s potential is well-established: a previous IEA report, World Energy Outlook 2017, showed that when combined with other measures, efficiency could realise over 40% of the carbon emissions reductions required to meet global climate change mitigation goals, the largest single contribution.
However, global energy efficiency investment grew only marginally in 2017 (up by 3% to $236 billion), according to the IEA.
About 60% of total efficiency investment is in the buildings sector, and it is this sector that the IEA report highlights as ripe for “finance and business model innovation”.
According to the report, “one factor favouring greater levels of investment is the replicable and scalable nature of building energy efficiency projects that have predictable returns and can be aggregated to appeal to third-party financiers.”
The EU has long been aware of the importance of energy efficiency. It has established a mix of policy drivers, including overall energy efficiency targets, energy efficiency obligation schemes, and regulation related to minimum energy efficiency standards (‘MEES’, formerly known as Minimum Energy Performance Standards or ‘MEPS’), which in some countries make it illegal to let energy inefficient properties.
A small reduction in absenteeism because a building is greener and more pleasant to work in will be worth much more than energy cost savings that result
Yet these policies are not delivering the expected results. According to Steve Fawkes, an independent energy efficiency expert and advisor to the Sustainable Energy Investment Forums, a European Commission initiative working with national authorities, what needs to be done is “to create a real marketplace for energy efficiency”. To do this, he says, “we have to improve the quality of supply and demand. This means addressing what I call the jigsaw of energy efficiency financing. Addressing one piece does not work.”
The “different pieces of the puzzle”, says Fawkes, include: standardization, finance for both projects and for development, large-scale project pipelines, and building supply-side capacity along with boosting demand. On this last point, Fawkes explains: “More people need to know what to ask for, and what the benefits of energy efficiency are – especially the more strategic and more attractive non-energy benefits. Mere energy cost savings is not enough.”
The non-energy benefits highlighted in the IEA energy efficiency market outlook report include “those concerning the macro economy and public health […], including for employment, productivity, and the incomes of individuals and businesses.”
To date, the top non-energy benefit for investors is increased asset value in buildings, according to Peter Sweatman, task group lead for G20 on energy efficiency finance, and a regular speaker at the European Commission’s Sustainable Energy Investment Forums.
The asset value is, he says: “a result of the increased rentability, lower gap periods and reduced regulatory risks attached to high performing commercial properties. There is work underway [by non-profit Buildings 2030] to better capture health benefits and this is particularly interesting in the context of future low carbon cities and air quality concerns.”
Also effective are regulations that allow banks to have lower capital reserves for certain types of assets
Other current research on evaluating and communicating non-energy benefits is ongoing in the Horizon 2020-funded project, M-Benefits.
Fawkes comments: “It is hard to establish a standardised way of assessing the different types of non-energy benefits in many situations. I think the real challenge is to persuade people who develop and then assess projects that non-energy benefits can have a monetary value and often it is much more than the value of energy savings. For example, a small reduction in absenteeism because a building is greener and more pleasant to work in will be worth much more than energy cost savings that result. Increase in product quality from improving control of an industrial furnace will also be more valuable and more strategic, than the savings on gas consumption.”
The DEEP end
Project promoters, banks, and financial institutions seeking to evaluate prospective investments, including non-energy benefits, can refer to the EEFIG Underwriting Toolkit, designed to assist financial institutions to scale up their deployment of capital into energy efficiency. Policy drivers for the financial sector “are very much linked to the recommendations from the Taskforce on Climate-related Financial Disclosures,” says Fawkes.
“These would be banking regulations that require financial institutions to assess and report climate-related risks, and already we can see that France, the Bank of England and others are heading this way. Also effective are regulations that allow banks to have lower capital reserves for certain types of assets e.g. “green” or energy efficient assets that have lower risk. This is a carrot as it allows them to make more money.”
Further evidence for returns on energy efficiency investment is available via the DEEP database, the biggest database of energy efficiency projects in Europe. Users can compare investments per country, per energy efficiency measure type, building or company type and performance verification method.
Ivo Georgiev, project manager at the consultancy business COWI, has been closely involved in the development of the database. He says: “DEEP is a dynamic tool, which has an enormous potential to address challenges to energy efficiency investments currently faced by financial institutions, policy makers and other stakeholders.”
Project types range from “low hanging fruit” with short payback times and limited risk that can be handled by existing financing mechanisms, to large, complex projects in industry. “These often lose out in competition, particularly when multiple non-energy benefits are not recognized,” says Georgiev. The database continues to evolve: DEEP 2 will be developed during 2018-2022.
“The key thing here is to continue to talk about the existence of non-energy benefits and get project developers and valuers/investors to include them in the economic assessment,” says Fawkes. “A few years ago, I was developing an energy efficiency project with a major company, and the project promoter within the company said he had got as far as persuading the CFO that non-energy benefits existed – they just had an issue valuing them – so then it became a judgement call. That is a good start but clearly it will be better if we can value them properly.”