Monday 5 February 2024

Photo credit: Nico Hogg, Creative Commons Attribution 2.0 Generic

It is now becoming widely accepted that increasing the flow of investment into energy efficiency is essential for hitting climate targets, as well as addressing issues including fuel poverty and energy security. Much of that investment will have to come from the private sector, from institutional investors. So how do institutional investors view energy efficiency and how could metered efficiency help increase the flow of investment into efficiency?

It has to be said that for many, (if not most), institutional investors, energy efficiency remains a bit of a mystery. When questioned about efficiency, many investors will say something like, ‘oh you mean solar panels and stuff’, which is not what we fundamentally mean by energy efficiency i.e. doing the same (or more) with less energy input. Back in the early 1990s the wind industry was in a similar position, early wind farm developers, (the author included), could only find one bank in London that knew anything about wind power and that was a US bank that had financed wind farms in California. Now there is a plethora of banks and financial institutions who understand every detail of the multi-billion pound wind business.

This lack of knowledge about efficiency amongst financial institutions is changing as they come under increasing regulatory and customer pressure to disclose climate related risks and directly address climate change through their investments and lending. Institutions that either own or lend to property portfolios, whether they be houses or large commercial buildings, in particular are increasingly recognising the potential for energy efficiency improvements as a way of mitigating climate risk.

There are four reasons why financial institutions are getting more interested in energy efficiency:

  • energy efficiency represents a large potential market.
  • Improving efficiency reduces risks in two ways:
    • firstly, increasing energy efficiency improves the cash flow of clients, thus reducing their risk.
    • secondly there is the risk of financing assets that become stranded as energy efficiency regulations are tightened. For example, tightening Minimum Energy Performance Standards exposes owners to the risk of owning an asset that cannot be sold or rented in future.
  • improving energy efficiency has a direct impact on reducing emissions of carbon dioxide and other environmental impacts such as local air pollution and therefore can be a key part of Environmental, Social and Governance (ESG) programmes.
  • finally, and probably most importantly, bank regulators are increasingly requiring institutions to estimate and disclose climate related risks and energy efficiency can reduce risks.


The barriers to investing in energy efficiency are well documented in thousands of papers and articles. For financial institutions the main barriers include, as well as the lack of understanding and capacity referred to above: the small scale of most energy efficiency projects, their heterogenous nature, lack of data, and performance risk – the risk that projects do not deliver the energy savings projected during the design process. Importantly as well, energy savings are the absence of something, a counterfactual, and invisible which is harder to deal with than for instance the production of energy. All these factors combine often to put energy efficiency into the more difficult box. If you control £100 million, and that is generally considered a small fund, it is easier to buy a couple of wind or solar farms than it is to originate, develop and deploy capital into hundreds of LED lighting installations or new heat pumps for example.

The lack of data and performance risk are major barriers to financial institutions. It is not so much that energy efficiency projects have risks, contrary to some opinions of course they do have risks – like all investments, it is more that the lack of data, (past, present and future), means that they are uncertain. Risks can be understood and mitigated, uncertainties are much harder to deal with. The lack of data on what actually happens when energy efficiency measures are installed would also inhibit Distribution Network Operators even considering energy efficiency measures as an alternative to network upgrades, even if they were enabled and motivated to do so by regulations, (which at the moment they are not).

For most of its history the energy efficiency industry has survived on ‘deemed’ savings – the level of savings that an engineering assessment says the projects will produce. Even with the advent of Measurement and Verification, (M&V), and the International Performance Measurement and Verification Protocol (IPMVP), very few energy efficiency projects were measured to see what the actual savings were.

Metered efficiency, the idea of establishing a common system of ‘weights and measures’ for measuring energy saved, emerged out of California about ten years ago. It is now being used widely across the US, allowing utilities and regulators to measure the effectiveness of energy efficiency programmes as well as the utilities to better understand and manage the changes in their load curves brought about by the adoption of roof top solar. For investors, (of all types from institutions to households), it offers the possibility of only paying for what you get, ‘pay for performance’, which is much better than paying for stuff and hoping that some energy savings result. It also opens up the possibility of having contracts that resemble Power Purchase Agreements (PPAs). PPAs are well understood and are a very bankable proposition, you can raise capital on the back of a PPA from a good counterparty. We could have EEPAs, Energy Efficiency Purchase Agreements, which define the amount of energy efficiency to be delivered, within some boundaries, and how much will be paid per unit delivered. They would look very similar to PPAs. Pay for performance contracts such as EEPAs would also serve to greatly improve the quality of energy efficiency projects being sold, if the supplier was only being paid on what was delivered they would have a bigger interest in delivering quality projects and maintaining savings over time. Suppliers delivering bad projects would rapidly go out of business. Pay for performance contracts would also avoid the need for costly and complex Energy Performance Contracts, (EPCs), from Energy Service Companies (ESCOs), which are used to put performance risk onto the contractor but in which they take a hefty margin to offset the risk of non-performance. With metered energy savings and pay for performance you simply pay for what is delivered, just like when you buy energy.

For utilities and regulators metered energy savings offers the possibility of really understanding the effect of energy efficiency and flexibility measures on an hourly (or less) basis. Targeting the reduction of energy use at times when grid generation is high carbon, could have a major impact on reducing overall emissions. There is not a lot of point saving energy in the middle of the day if all the load is capable of being met by roof top solar, you want to save energy when the gas (or other fossil fuelled) generators are on. Such precise targeting requires understanding the time aspect of energy efficiency, energy savings are not as we often implicitly assume, spread equally over 24 hours a day. In the right regulatory environment, which we don’t yet have in the UK, distribution companies could use metered energy savings to invest in energy efficiency projects with a better economic, and social, return than investing in network upgrades such as new wires and sub-stations.

In conclusion, metered energy savings can make energy efficiency more like energy supply, and therefore make it more investable for financial institutions, energy distribution companies, and end customers. The RetroMeter project, supported by Ofgem’s Strategic Innovation Fund and delivered by a consortium consisting of: Electricity North West; Energy Systems Catapult; Carbon CoOp; Manchester City Council; and ep Consultancy; is developing an approach to metered efficiency savings and applying it to a residential retrofit project in Manchester with a focus on heating energy. As well as testing different approaches to metering energy saving, it is looking at the benefits for different stakeholders from the householder, to the Distribution Network Operators, to the health service, as well as developing business models that could help bring in more investment into energy efficiency through mechanisms such as pay for performance.

Details on the RetroMeter project can be found on the Electricity North West website

https://www.enwl.co.uk/future-energy/innovation/strategic-innovation-fund/retrometer/retrometer-discovery-phase/






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Dr Steven Fawkes

Welcome to my blog on energy efficiency and energy efficiency financing. The first question people ask is why my blog is called 'only eleven percent' - the answer is here. I look forward to engaging with you!

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