The following article comes from the Energy Efficiency Financial Institutions Group (EEFIG) that has just launched a new Underwriting Toolkit for financial institutions who are currently reviewing and establishing internal procedures to review and approve energy efficiency projects. Hopefully it will even inspire those financial institutions who are just starting out to consider financing energy efficiency projects.
EiD, through its association with Energy Efficiency in Industrial Processes, is a member of EEFIG.
Energy efficiency is a “win-win” for investors. But we need better financial products and visibility
Think of the transition to a sustainable economy, in line with the Paris Agreement, and you’ll probably imagine a landscape dotted with wind turbines, solar panels and electrified transport. This is understandable, but if the global economy is to succeed in meeting its climate targets, emissions and energy savings in the building sector become vital. Buildings account for 40% of final energy consumption in the EU and contribute about 36% of EU greenhouse gas (GHG) emissions : the transformation of our cities and the renovation of our buildings can deliver huge gains in economy-wide energy efficiency. But these numbers still surprise many people. Energy savings must make the biggest contribution to emissions reduction between now and 2050. Every year the need gets greater and the technologies cheaper, with the IEA and the International Renewable Energy Agency now estimating that global investment in energy efficiency needs to reach $1 trillion per year compared to the current level of around $220 billion. That is a fivefold increase – with current technologies.
One way to step up the pace is ensuring that financial institutions can better understand, value and monitor the performance of energy efficiency investments so they can design and price much more appropriate financial instruments for their clients. They also need to improve economies of scale through a massive retail and commercial scale-up. In addition, some investment-types have much more sophisticated and reliable internal processes and tools, which massively reduce the time and risk associated with the investment, making a € 1 billion transaction similar, in terms of energy and time needed to close it, to a € 100 million deal. Investors are naturally centered on risk and return, so the focus should be on creating clearer metrics for energy efficiency.
There is an increasing amount of legislation around energy efficiency standards, for new buildings and building equipment. but this is not sufficient to stimulate faster and deeper renovation. Fostering renovation activities indeed requires striking a balance between creating tools that stimulate the financial market for energy renovations and defining mandatory requirements for better energy performance of all buildings, starting from public and commercial buildings. The Clean Energy for All Europeans package, published by the European Commission end of 2016 and the revision of the Energy Performance of Buildings Directive (EPBD) are a great opportunity to provide the right tools.
In financial terms, to boost investor confidence in energy efficiency projects, more analytical resources are needed, to allow intermediaries to group securities into baskets so that institutional investors (like pension funds) and investment banks can easily invest in them, –ideally as de-risked, investment-grade assets. It would also help hugely if investments (for example green bonds or specifically-designed loans) and individual balance sheet assets were “tagged” as with their energy performance and energy efficiency characteristics so their performance can be better tracked across the whole portfolio and, in aggregate, the economy.
Transparency and financial confidence go hand in hand. And pushing for transparency and consistency was precisely the rationale behind setting up the Energy Efficiency Financial Institutions Group (EEFIG) in 2013 by the European Commission and the UN Environment Finance Initiative (UNEPFI). The mission of EEFIG is to de-risk investments in energy efficiency, working with over 120 contributing experts from every part of the financial sector.
June 22nd at the EU Sustainable Energy Week (EUSEW), European Commission Vice-President Maroš Šefčovič launched EEFIG’s new Underwriting Toolkit for the many financial institutions who are currently reviewing and establishing internal procedures to review and approve energy efficiency projects. The Toolkit has been designed with the input from over 20 of these institutions. In conjunction with the DEEP database, the toolkit provides information aimed specifically at the different units and individuals within financial institutions whose task is to evaluate, assess, approve and process energy efficiency transactions.
The Guide comes after last year launch by EEFIG of a database on energy efficiency projects across Europe (the DEEP database), gathering real numbers from real projects with new additions all the time. DEEP will contain details of over 10,000 individual energy efficiency projects across buildings and industry. Anyone can use it but it is geared to investors. The projects in the DEEP database suggest that the median avoided cost of energy is 2.5 Eurocents/kWh for buildings and 1.2 Eurocents/kWh for industry. That is below half as much as equivalent generation costs.
At the moment, about 85 per cent of all energy efficiency investment has been financed with existing sources of finance or self-financed, rather than with specific energy efficiency products. This has to change and the Guide is one of the steps that can be made towards this positive shift.