The key barriers to long-term financing for energy efficiency can and must be overcome. A growing chorus of experts believe that the pathway to success lies in the adoption of new policies and the development of smart market solutions.
To do just that, the Energy Efficiency Financial Institutions Group (EEFIG) was convened in 2013 by the European Commission Directorate-General for Energy and the United Nations Environment Programme Finance. Increasing the rate of investment into energy efficiency is recognised as critical for addressing climate change, with efficiency proven to be the most cost-effective route to reducing carbon emissions. The scale of the task, and the opportunity, is highlighted by the IEA’s Efficient World scenario, which requires global investment in energy efficiency, currently c.$240 bn per annum, to double by 2025 and then double again between 2025 and 2050.
EEFIG has over 100 institutional members balanced between financial institutions, energy efficiency market stakeholders and policy-makers and experts. Its seminal 2015 report analysed the barriers to investing in energy efficiency and made a number of recommendations to market participants and policymakers as to how to overcome them. Many financial institutions are increasingly looking to invest or deploy capital into energy efficiency – as was illustrated in the level of support for the G20 Energy Efficiency Investment Toolkit - yet actually doing so is hard, especially compared to investing in energy supply projects. Efficiency projects tend to be small, diverse and there is no energy output that can be metered, savings are counterfactuals, contracts can be complex and vary greatly, and the results are often not measured.
Peter Sweatman, the EEFIG Rapporteur, described the EEFIG process as “unique in the way it consistently kept all the relevant actors together and focused on delivering firstly an assessment, then a roadmap and finally jointly designed and delivered tools to deliver against its own recommendations”.
The EEFIG De-risking Project, supported by the EU Commission from 2016-18, addressed some of the barriers identified by the EEFIG report and created two products; the De-risking Energy Efficiency Platform (DEEP) and the EEFIG Underwriting Toolkit. Both are available on-line at the EEFIG website as a resource.
The DEEP is an open-source database of more than 10,000 energy efficiency projects across Europe covering both buildings and industry. Data was contributed by more than 25 organizations across Europe and it can be interrogated by technology and country. It is possible to review groups of projects but not individual projects due to privacy concerns. It is believed to be the largest database of energy efficiency projects in Europe. Although the ideal is to include actual financial performance this of course proved difficult and only c.10% of projects have any actual financial performance data, the rest have projections made at the time of investment. Despite that it remains a valuable resource for organisations looking to develop or finance energy efficiency projects.
Carsten Glenting, the EEFIG Support Consultancy manager, explained that “the DEEP platform has addressed a key barrier to scaling up energy efficiency investments through the collection of evidence on the performance of energy efficiency investments in buildings and industry and confirms that energy efficiency remains the cheapest fuel.”
The Underwriting Toolkit aimed to create a common approach to underwriting the value and risks of energy efficiency projects. The value of energy efficiency is far more than just the value of the energy saved. Many non-energy benefits, including improved health, improved educational outcomes, reduced risk of price volatility, improved productivity and increased building value have now been recognised. These need to be identified and valued as part of investment appraisal. Risks are an important consideration and the uncertainties around the outcomes of projects is one barrier to increasing investment but traditionally the energy efficiency industry ignored risk. A 1980s text book on energy efficiency said; “the returns are tremendous and there is virtually no risk”. This optimistic view is of course not true, efficiency projects have risks just like other projects but until recently there has been little or no actual data that allows us to move from uncertainty, not understanding the risks, to risk management. Where data is available it shows, perhaps not surprisingly, that some projects under-perform, some over-perform but on average portfolios of projects perform reasonably well.
Steven Fawkes, who was the principal author of the Toolkit, said “project developers and finance people speak completely different languages, one technical and one financial. The Underwriting Toolkit provides a common language that developers and financial people can use to collaborate through the project and programme development process to ensure that efficiency projects really are bankable”.
One of the real issues in energy efficiency is the “performance gap”, the difference between projections and actual performance which is due to several factors but one of them, highlighted in the original EEFIG report, is a lack of standardisation in the way that projects are developed and documented. This problem is addressed by the Investor Confidence Project which has developed protocols and a quality assurance system for projects in buildings, industry, district heating and street lighting, which can lead to projects being certified Investor Ready Energy Efficiency. The Investor Confidence Project originated in the US but was introduced to Europe with the help of two European Commission Horizon 2020 grants totalling €3.5m.
The EEFIG DEEP and the Underwriting Toolkit are valuable resources to help derisk investment into energy efficiency and with the start of the four-year EEFIG 3 project at the end of 2018 it is planned that they will be further developed. Although work programmes have not been finalised yet, and are subject to agreement by the members of EEFIG, it is likely that DEEP will expand the number of projects and look for ways to acquire more actual performance data, both technical and financial. The Underwriting Toolkit could evolve into a training tool for banks and financial institutions looking to expand capital deployment into energy efficiency.
EEFIG has been, and continues to be, an influential force for increasing investment into energy efficiency and the derisking tools, DEEP and the Underwriting Toolkit, are important tools for project developers and investors seeking to do just that.