Monday 27 June 2016

On the 22nd June I was asked to speak at a high level meeting in Brussels on energy efficiency on the topic of growing the energy efficiency financing market and two specific projects I am heavily involved with, the Energy Efficiency Financial Institutions Group (EEFIG) derisking project and the Investor Confidence Project (ICP. Here is a cleaned up version of my speaking notes. Of course my shopping list for EU policy measures has been made somewhat redundant by recent events but they apply equally to the UK and elsewhere .

Before talking about growing the efficiency financing market and the two specific projects I am going to cover I would like to start with a status report on the energy efficiency financing market.

There is some good news:
– after many years the potential for investment into energy efficiency has been recognized. Different analysts have different numbers but there is general agreement that circa €70 to €100 billion a year could be profitably invested into energy efficiency in Europe. For comparison in 2015 $58 billion was invested into renewables, down sharply from $132 billion in 2011 and so we are dealing with a manageable amount here.
– The many non-energy benefits that come from improved energy efficiency – everything from increased sales and productivity through to health and well-being effects – have been recognized and are starting to be valued. This is really important because these non-energy benefits are much more strategic and attractive to decision makers than “mere” energy savings.
– Many institutional investors and banks are now really interested in energy efficiency – this is a major change over the last 3 to 5 years. Efficiency has real economic benefits, it has impact and it is not reliant on subsidies – some of us have known that for years but now the bankers have caught up. Because of this the efficiency industry can no longer rely on that old excuse……there is no money. There is plenty of money but a lack of investable deals.

The not-so-good news is that in Europe, and elsewhere, there is deep frustration that the energy efficiency finance market is going very slowly. As one banker said; “the problem with energy efficiency finance is that the ratio of conferences to deals is too high”. It is getting better but it is still a niche activity and far from being the dynamic, well developed market we need it to be.

So, given that we want to, and in fact need to, accelerate the rate of investment into energy efficiency what are the barriers and what should we be doing to overcome them? Firstly, we need to recognize that there are many barriers including:
– very small project sizes – especially compared to institutional investors’ typical deal size and the needs of the debt capital markets.
– efficiency is invisible.
– it is hard to measure – or at least it has been – that is starting to change with advanced metering, measurement and verification technologies.
– and one really important point is that efficiency is definitely not cool, not sexy or even photogenic.
We have to acknowledge that there is a fundamental lack of demand – because hardly anyone wakes up in the morning and says; “I want to buy some energy efficiency”.

An other major barrier identified by the Energy Efficiency Financial Institutions Group (EEFIG) and others is the lack of standardization in the way that projects are developed, documented and presented – this leads to higher risks, or perceived risks, and high transaction costs for financial institutions. So, how do we overcome these barriers and make the energy efficiency financing market rock?

I think there are four key elements which need to be brought together in what I call the jigsaw of energy efficiency finance:

1. finance – and by that I mean both project finance and development finance i.e. the risk capital to develop projects.
2. real demand and a robust project pipeline which requires several things – a new ecosystem of project developers, better development skills, but also better selling skills built around a focus on non-energy benefits which are much more strategic and attractive than “just” energy cost savings.
3. capacity building in financial institutions, the energy efficiency industry and project owners.
4. derisking through the standardization of processes, contracts and reporting of results.

I want to talk about two projects that are addressing some of the key elements of the derisking piece; the EEFIG Derisking project and the Investor Confidence Project.

The EEFIG Derisking project is funded by DG ENER and is being steered by the circa 100 members of EEFIG. It has two linked parts:

1. building a database of project performance so that owners and investors can see how projects actually perform and over time we can build an actuarial database of actual performance – both energy and financial performance.
2. developing standardized underwriting procedures such that banks and financial institutions can better assess both the value and the risks of energy efficiency projects which will lead to better pricing, and help to build capacity.

We are currently building the database, which is called DEEP (Derisking Energy Efficiency Platform) and we are collecting data on several hundred projects. Individual projects will be anonymous and if anyone in the audience is able to provide project data the Commission, myself and the team will be very happy to talk to you in detail. The more projects of all sorts, across buildings and industry we can have in DEEP the more useful it will become, for investors, lenders, project developers and project owners.

We also welcome any input from financial institutions into developing the standardized underwriting framework that we believe can become a useful tool for those investors and banks keen to increase capital deployment into energy efficiency. It will help them to fully assess risks and value – from all sources –leading to better pricing, build capacity around standard processes, and better manage overall risk in portfolios of projects.

The second important project is the Investor Confidence Project (ICP) Europe. I brought the idea over from the USA and in Europe the ICP is supported by Horizon 2020. The ICP addresses the lack of standardization at a technical level by bringing together financiers and the energy efficiency industry to agree common Protocols for developing and documenting projects. We now have >150 Allies across Europe and have published six protocols which are now being used in a growing number of building renovation projects across the EU. The ICP has also introduced a project developer and quality assurance accreditation scheme that is called Investor Ready Energy Efficiency. Our investor network has over €1 bn they would like to deploy into energy efficiency and many of them offer lower fees or interest rates for standardized ICP accredited projects. We are now looking at expanding the suite of protocols to include industry and infrastructure.

When I think about what else do we need, particularly from Brussels, I have the following shopping list:

– ensure all EU funded projects have to provide performance data into the DEEP database and encourage all project developers, vendors and financiers to support DEEP and similar evidence platforms. It would be foolish to establish DEEP and then not require funded projects to contribute to it.
– ensure EU funded projects adopt standardization of the development and documentation of projects using the Investor Confidence Project protocols.
– focus on the project development piece and building demand. This needs to be done by:
o providing more technical assistance but very tightly focused assistance, don’t just give money out to municipalities who want to do “investment grade audits” and assume banks will lend on the back of those audits
o focus on selling non-energy benefits – I now say let’s not even mention the energy savings, sell the comfort, the health and welfare, the employment or whatever is most likely to push the buttons of the decision maker – and then say “by the way it also produces some energy cost reduction”.
o selling the benefits of financed energy solutions. This has to be done at local and regional level.
– use EU funds like Structural Funds to further derisk private capital – don’t crowd out private capital by lending to projects but rather create mechanisms like first loss loan reserves – you get much more bang for the euro that way.
– start working on enabling collection mechanisms such as On Bill Recovery (OBR) and Property Assessed Clean Energy (PACE) which is based on local property tax. In the US PACE funded retrofits have really started to accelerate and there has been more than $1 billion of securitization of PACE loans in the last 12 months. There is now a real secondary market which allows recycling of capital and proper risk allocation. I know that property tax systems are different across Europe but we need to work out how to use them in a mechanism like PACE in each member state.
– Insist on open energy data. US cities like New York and Chicago have pioneered the open publishing of normalized energy consumption data for commercial buildings above a certain floor area. If you can’t yet do it for commercial buildings (even though there is no reason not to other than a lack of leadership), then insist upon it for all EU buildings and member state government estates.
– Finally, really take a long hard look at what is happening in California where the latest regulations are moving towards requiring metered efficiency and pay for performance. We need to move out of the old energy efficiency paradigm which is mandate and public sector led into a market led paradigm where we pay for what we actually want – negawatt hours. Using this approach we can create a real market where efficiency is just as reliable and just as financeable as energy production. Let’s start actually paying for real performance i.e. energy savings rather than for stuff, boilers, insulation etc and praying for results.

So, on the day before the historic referendum on UK membership of the EU, that is my small shopping list for today.

I just want to say that I am more optimistic than ever that we are building the foundations of a vibrant energy efficiency financing market by bringing the four pieces; derisking. finance, demand and capacity building, together, but we still have a long way to go. If we build that market I think everyone will be surprised by how much efficiency is actually delivered.

Again, making reference to the referendum which is hard to avoid doing, I want to finish by saying that I think EC policy in this particular area is joined up, it is helping to build the jigsaw and is moving in the right direction – if anyone wants to tell the BREXIT campaign that is fine by me.

Thank you for listening!


There are 3 comments on “Growing the energy efficiency financing market”:

  • Andre Burgess on June 27th, 2016 at 2:59 pm said:

    as always a very informative article. Any views now that we are ‘supposed’ to be Brexiting? Or impossible to draw any informed conclusions as there is no government position yet on this?

  • Gabriel QUENTIN on July 12th, 2016 at 10:25 pm said:

    Hello Steve,
    Steve, thanks for your work !
    We might be able to take part in feeding the database for ICP with our individual home retrofitting pilot program. With oktave, in Alsace France, we aim to retrofit 1000 houses at under 100kwh/y/m2, before 2018. Depending on what data you’re looking for. ..of course.
    Contact me for more details.

  • Energy efficiency is the US electricity sector’s third largest resource – Energy Systems & Services on October 20th, 2016 at 7:22 pm said:

    […] a leading European campaigner on this topic, he observes that “many institutional investors and banks are now really interested in energy efficiency – […]

Dr Steven Fawkes

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