How to unlock lasting value

Getting more out of money spent on energy bills is an obvious thing to do. Many simple energy productivity measures pay for themselves within weeks or months. More expensive measures, such as thermal insulation of buildings or recovery of industrial waste heat may take years, but on the long term are profitable nevertheless. The EU aims to raise energy productivity and to reduce its energy consumption by nearly a third (32.5%) in the next decade. Yet, this is not straightforward. A vast potential of underexploited energy productivity measures remains, for many reasons.

For a start, boosting energy productivity implies using less energy to do the same thing. Basically, this means reducing costs, and typically cost-reducing measures compete with more alluring investments in core businesses. Investment horizons are often not much longer than two years. Business departments may work in silos and may be subject to different budgets, so that costs and benefits are unevenly spread across units. Overhauling a building or an industrial process may be cumbersome. It may be difficult to prioritize measures. New technology may be unknown.

It is certainly unhelpful that energy productivity is unknown territory for many financial institutions. Banks, investors, insurers and regulators are increasingly updating their strategies to take into account the risks and opportunities presented by the clean energy transition. Yet, while renewable energy investments have become a standard practice for most financial institutions, investments in energy productivity measures are relatively small. According to the International Energy Agency global investment in energy efficiency in 2018 amounted to no more than US$ 240 billion, and this falls short of the trillion required to meet sustainability goals.

image by MINTiki, Picabay

A range of barriers hamper financial institutions in further upscaling energy productivity investments, even if owners or project developers have an interest. The Energy Efficiency Financial Institutions Group, established in 2013 by the European Commission and the United Nations Environment Program Finance Initiative, listed some essential hurdles (here). For example:

·        Benefits are in the form of energy savings, which makes it more difficult for a bank to secure cash flows than in other projects.

·        Energy savings are difficult to predict and measure precisely, and they are subject to variable weather or fluctuating energy demand.

·        Energy productivity investments do not stand alone, but are typically hidden in larger financial exposures of banks and investors. This makes it more difficult to track them.

·        In residential buildings energy productivity may suffer from split incentives, where a tenant benefits from the energy savings generated by measures paid for by owners.

·        There is a lack of standardisation in project documentation. Besides, project developers, engineers and bankers typically speak different languages. As a result, project development and due diligence costs can be high.

There is a salient need to resolve these hurdles and speed up investments that will increase energy productivity. The Triple-A project sets out to make such investments more transparent, predictable and attractive for investors and financiers as well as project developers, and more initiatives are underway.

Should you have an interest in financing or investing in energy productivity, or a question or view to share, feel free to drop me a line (email heleen at ieecp.org). I’ll be happy to connect.

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