November 15, 2018
“Aggressive efficiency improvements will be crucial to limit global warming” states the International Energy Agency’s latest market outlook report on energy efficiency. The buildings sector is singled out as ripe for “finance and business model innovation” according to the IEA report – a view endorsed by global energy efficiency expert Dr. Steve Fawkes. “Selling the business case based only on energy cost savings is not enough”, says Fawkes. Monetising the non-energy benefits and enabling the financial community to assess the value and risk are more likely to help bridge the EU’s 2030 energy efficient buildings investment gap – currently standing at around €100 billion per year.
“Our study shows that the right efficiency policies could alone enable the world to achieve more than 40% of the emissions cuts needed to reach its climate goals without requiring new technology,” said Dr Fatih Birol, Executive Director of the International Energy Agency (IEA), commenting on the IEA’s market outlook on energy efficiency, published on 19 October.
Energy efficiency’s potential is well-established: a previous IEA report, World Energy Outlook 2017, showed that when combined with other measures, efficiency could realise over 40% of the carbon emissions reductions required to meet global climate change mitigation goals, the largest single contribution.
This year’s report has a new feature, the Efficient World Scenario (EWS), showing what would happen if all available energy efficiency measures were implemented between now and 2040. All these measures are cost-effective, based on energy saving alone, and use technologies that are readily available today.
In this scenario, annual investment in efficient buildings and appliances rises from USD 140 billion (United States dollars) in 2017, to an average of USD 220 billion up to 2025, and then to USD 360 billion to 2040. Furthermore, “the magnitude of the savings achieved in the EWS would make the climate change targets under the Paris Agreement and the UN Sustainable Development Goals (SDGs) much more achievable” according to the report.
However, despite the economic and societal returns, investment is not currently on track to achieve this kind of scale. Global energy efficiency investment grew only marginally in 2017 (up by 3% to USD 236 billion). About 60% of total efficiency investment is in the buildings sector, and it is this sector that the report highlights as ripe for “finance and business model innovation” that can drive the scale of investment needed. According to the report, “one factor favouring greater levels of investment is the replicable and scalable nature of building energy efficiency projects that have predictable returns and can be aggregated to appeal to third-party financiers.”
In terms of financial incentives, the largest part (48%) of public spending on energy efficiency is in the form of grants and subsidies, followed by tax relief and credits (31%). The report notes that: “the strong preference for grants and direct subsidies may reflect the fact that policy makers are familiar with them and that they are easy to administer and communicate.” The case for overall subsidy reform is highlighted: in the countries surveyed by the report, total spending on fossil fuel consumption subsidies amounted to USD 103 billion in 2016.
The report cites white certificates and energy efficiency obligation schemes as examples of the kind of market-based instruments that can scale investment – and give good value for money to the public purse. Investment volume generated by MBIs has increased six-fold over the last ten years, with the majority of MBIs achieving public/private leverage rates of up to 200%, meaning that for every dollar of public investment, two dollars of private sector investment is triggered.
Europe accounts for 30% of total global investment in the buildings sector, according to the IEA report, and the emerging energy efficiency market in the buildings sector was estimated in 2015 at €109 billion in EU 28. European policy drivers include overall energy efficiency targets, energy efficiency obligation schemes, and regulation related to minimum energy efficiency standards (‘MEES’, formerly known as Minimum Energy Performance Standards or ‘MEPS’), which in some countries make it illegal to let energy inefficient properties.
Dr. Steve Fawkes, a global energy efficiency expert, comments: “In the UK and Netherlands real estate sector, the regulations on MEES will render a significant proportion of financed assets at risk of becoming stranded and non-financeable. This is a wake-up call to investors in real estate.”
“Mere energy cost savings is not enough”
Fawkes is also an advisor to the Sustainable Energy Investment Forums, a European Commission initiative working with national authorities across Europe to boost investment and financing for sustainable energy. “To create a real marketplace for energy efficiency, we have to improve the quality of supply and demand,” says Fawkes. “This means addressing what I call the jigsaw of energy efficiency financing. Addressing one piece does not work,” he adds.
According to Fawkes, the different pieces of the puzzle include: standardization, finance for both projects and for development, large-scale project pipelines, and building supply-side capacity along with boosting demand. On this last point, Fawkes explains: “More people need to know what to ask for, and what the benefits of energy efficiency are – especially the more strategic and more attractive non-energy benefits (NEBs). Mere energy cost savings is not enough.”
The non-energy benefits highlighted in the IEA energy efficiency market outlook report include “those concerning the macro economy and public health […], including for employment, productivity, and the incomes of individuals and businesses.”
To date, the top non-energy benefit for investors is increased asset value in buildings, according to Peter Sweatman, task group lead for G20 on energy efficiency finance, and a regular speaker at the European Commission’s Sustainable Energy Investment Forums. The asset value is, he says: “a result of the increased rentability, lower gap periods and reduced regulatory risks attached to high performing commercial properties. There is work underway [by non-profit Buildings 2030] to better capture health benefits and this is particularly interesting in the context of future low carbon cities and air quality concerns.” Other current research on evaluating and communicating NEBs is ongoing in the Horizon 2020-funded project, M-Benefits.
Fawkes comments: “It is hard to establish a standardised way of assessing the different types of NEBs in many situations. I think the real challenge is to persuade people who develop and then assess projects that NEBs can have a monetary value and often it is much more than the value of energy savings. For example, a small reduction in absenteeism because a building is greener and more pleasant to work in will be worth much more than energy cost savings that result. Increase in product quality from improving control of an industrial furnace will also be more valuable and more strategic, than the savings on gas consumption.”
In the DEEP end
Project promoters, banks, and financial institutions seeking to evaluate prospective investments, including non-energy benefits, can refer to the EEFIG Underwriting Toolkit, designed to assist financial institutions to scale up their deployment of capital into energy efficiency. Policy drivers for the financial sector “are very much linked to the recommendations from the Taskforce on Climate-related Financial Disclosures,” says Fawkes.
“These would be banking regulations that require financial institutions to assess and report climate-related risks, and already we can see that France, the Bank of England and others are heading this way. Also effective are regulations that allow banks to have lower capital reserves for certain types of assets e.g. “green” or energy efficient assets that have lower risk. This is a carrot as it allows them to make more money,” he adds.
Further evidence for returns on energy efficiency investment is available via the DEEP database , the biggest database of energy efficiency projects in Europe. Users can compare investments per country, per energy efficiency measure type, building or company type and performance verification method.
Ivo Georgiev, project manager at the consultancy business COWI, has been closely involved in the development of the database. He says: “DEEP is a dynamic tool, which has an enormous potential to address challenges to energy efficiency investments currently faced by financial institutions, policy makers and other stakeholders.”
Project types range from “low hanging fruit” with short payback times and limited risk that can be handled by existing financing mechanisms, to large, complex projects in industry, “these often lose out in competition, particularly when multiple non-energy benefits are not recognized,” says Georgiev. The database continues to evolve: DEEP 2 will be developed during 2018-2022.
“The key thing here is to continue to talk about the existence of NEBs and get project developers and valuers/investors to include them in the economic assessment,” says Fawkes. “A few years ago, I was developing an energy efficiency project with a major company, and the project promoter within the company said he had got as far as persuading the CFO that NEBs existed – they just had an issue valuing them – so then it became a judgement call. That is a good start but clearly it will be better if we can value them properly,” he adds.