Thoughts on Energy Efficiency First

Anyone funding a project, or looking to investor loan money to a project or a company, should consider energy efficiency first.

There are two basic scenarios to think about:

1. Energy supply projects or assets
2. Energy consuming projects or assets

For all energy supply projects it is possible, and necessary, to ask whether the capital would be better deployed, where ‘better’ is defined as better or the same returns but with greater impact on energy supply and carbon emissions. In many cases investing in energy efficiency may produce better returns, optimize capital across the energy system, and produce more energy services over the life of the investment. Of course developing and implementing energy efficiency projects on the scale of energy supply projects, which are typically in the range of 10s of millions to billions of euros/pounds/dollars is not easy and we need to develop more capacity and know-how in this area.

For any consuming project or asset, which basically means nearly all buildings, manufacturing processes and plants, and all transportation systems, the question to ask is ‘are there opportunities to improve the energy efficiency of this project or asset cost-effectively that are not being exploited?’. Note that cost-effectiveness is defined by the investors’ required rate of return rather than some arbitrary number. Almost certainly there will be opportunities to improve energy efficiency, either by changing the design of the whole thing, or sub-systems within it if it is a new project or asset which is yet to be constructed or by retrofit and refurbishment opportunities if it is an existing asset.

Financial institutions which are committed to net zero, and which therefore should be committed to energy efficiency first, need to be asking these questions of all potential investments or loans. Furthermore, they need to be considering:

• how they can assist project sponsors or developers to bring forward projects in which these questions have already been answered.
• What tools they need to determine whether the answers being given to the questions are robust.

In emerging economies, where demand for basic energy services is growing rapidly, the balance between energy supply and energy efficiency investment may be different than in a mature economy, but the questions should still be asked and global experience shows that there are many opportunities for cost-effective energy efficiency in emerging economies, perhaps even more than in mature economies. Increasing the flow of capital into these opportunities can reduce energy supply constraints and make each dollar of investment into energy supply more effective in meeting energy needs and supporting SDG 7.