Energy efficiency finance:

assembling the jigsaw

Dr. Steven Fawkes

DENEFF

25th March 2015

European Commission Disclaimer

This project has received funding from the European Union’s Horizon 2020 research and innovation programme

under grant agreement No 649836.

The sole responsibility for the content of this presentation lies with the authors. It does not necessarily reflect the

opinion of the European Union. Neither the EASME nor the European Commission are responsible for any use that may

be made of the information contained therein.

Status report on EE financing

• Scale of market potential recognized

• Co-benefits increasingly recognized

• Growing interest from institutional investors

• Slow development of the EE financing market – leading to frustration

✔

✔

✔

✗

“The ratio of conferences to deals is too

high!”

• Strong demand by owners and investors

• Highly skilled and accredited workforce

• A mix of financing products at attractive rates

• Standardized tools for tracking and quantifying savings

• Active secondary market

A healthy European energy efficiency market would have:

Capacity

building

supply

side

Standardization

Product

offerings

Development

gap

Capacity

building

demand

side

Capacity

building

financial

institutions

Standardization

EEFIG conclusions

“From a financier's perspective, energy efficiency projects

entail high transaction costs and are perceived to be

risky due to the difficulty of predicting accurately

energy cost savings. Sufficient experience with

underwriting energy efficiency loans and standardized

evaluation methods for measuring and verifying

energy savings is still lacking. The lack of secondary

markets to provide exit opportunities for investors, or

further liquidity to the investments is another important

barrier.”

— JRC Science and Policy Report, Financing Building Energy Renovations

(2014), Marina Economidou and Paolo Bertoldi

JRC conclusions

Citigroup conclusions

Energy efficiency is in a category by itself. With the

exception of one company packaging energy efficiency,

energy efficiency projects do not yet meet the

requirements of capital markets. The industry is just

too disaggregated. No two projects or contracts are

alike. Securitization is not practical or possible under

these circumstances. Say you have 1,000 energy

efficiency projects, Standard & Poor’s would have

to read 1,000 documents to assess the risk. Fees

won’t pay for that level of review.

Michael Eckhart

Managing Director & Global Head of Finance and

Sustainability at Citigroup

International Energy Agency conclusions

The IEA’s Energy Efficiency Market Report 2014

highlighted ICP as a program that will “facilitate a

global market for financings by institutional

investors that look to rely on standardized

products.”

Energy financing

Standardized

Mainstream

Large volume

Multiple sources

Standardized

Mainstream

Large volume

Multiple sources

NOT standardized

NOT mainstream

SMALL volume

FEW sources

www.eeperformance.org

Current lack of standardization

Greater performance risk

Higher transaction costs

Cannot build capacity

Cannot aggregate

ICP Energy Performance Protocols

BASELINING

• Existing Building

• Drawings

• Weather File

• Energy Usage

• Energy Rates

• Occupancy

SAVINGS

• Model File

• Calibration Data

• Bid Packages

• Certifications

COMMISSION

• Cx Plan

• Cx Authority

• Test Procedures

• Facilities Req.

OPERATIONS

• BMS Points

• Fault Plan

• Maintenance Plan

MEASUREME

• M&V Model

• Regression

Model

• Adjustments

• Impact

• Baseline

Adjustments

C

x

ICP Protocol development process

Organize market leaders to provide input into the development of the protocols

– Financiers

– Building owners

– Developers, installers, ESCOs

– Government agencies

– Utilities

ICP North American Protocols

Large Commercial

Standard Commercial

Targeted Commercial

Large Residential

Standard Residential

Targeted Residential

Third Party

Verification

[to follow

soon]

Contractor, Software and QA Accreditation

Investor Ready Energy Efficiency

ICP Europe – initial focus

In-country advocates

UK

Germany

Austria

Bulgaria

Portugal

ICP Europe Steering Group

ICP Europe Network Members

2017 2016

Investor Confidence Project Europe

CREATE TOOLS Protocols

Accreditation

Labels

Open data

TAKE TOOLS TO MARKET Private investors

Public programmes

Developers

Property owners

Utilities

BE A CATALYST FOR CHANGE Inspire action

Connect projects to capital

Create working examples

2015

Capacity

building

demand

side

EE is so boring

• Large yawn

Energy efficiency is

so……boring

Supply system benefits

- Power supply

- T&D capacity

- Environmental

- Losses & reserves

- Risk

- Credit & collection

Participant benefits

- Productivity

- Quality

- O&M costs

- Health impacts

- Employee productivity

- Lower absenteeism

Society benefits

- Air quality

- Water

- Solid waste

- Energy security

- Economic development

- Health

Examples of co-benefits

• Removing constraints on production expansion (Costa Coffee)

• Increased retail sales (M&S)

• Reduced need for operator intervention (Worsley Alumina)

• Increased throughput (Metalexacto)

• Reduced corrosion inhibitor & reduced corrosion (Danish liquid gases company)

• 39% reduction in days lost at work (New Zealand)

• Office productivity (Springfield, OR utility)

Capacity building demand side

• ISO50001

• Value co-benefits

• Integrated design

• Consider outsourced energy services

– Bring expertise and finance

– Can accelerate deployment

Development

gap

The gap between potential and

bankable projects

Mind the development gap

• Overcoming the development gap requires:

– Vision

– Skills

– Finance

– Standards

• Need to develop multi-building projects to achieve scale

Product

offerings

Traditional EPC / ESCO is not the answer

• Usually on balance sheet

• Debt constrained by mortgage covenant or structure

• Guarantee is not a credit enhancement

• Transaction costs

• Tenant-landlord split incentive

• May work well in public sector but not in commercial property sector

Innovation is appearing

• Efficiency Services Agreement (ESA)

• Managed Energy Services Agreement (MESA)

• Measured Energy Efficiency Transaction (MEETS)

We need more innovation

Capacity

building

supply

side

Capacity building – supply side

• Start with finance

• Develop projects at scale

• Innovate offerings

• Understand the markets better

• Sell co-benefits

Capacity

building

financial

institutions

Capacity building - financial

• Standardisation

• Training on:

– Multiple benefits

– Technologies

– Contract types

– Standards

– Available support e.g. EC, EIB, national programmes

Capacity

building

supply

side

Standardization

Product

offerings

Development

gap

Capacity

building

demand

side

Capacity

building

financial

institutions

You can cut the jigsaw pieces

precisely to make them fit better but if you don’t have all

the pieces you can’t finish the puzzle

WORK ON ALL THE PIECES

Policy considerations

• Reward all the value streams

• Design energy market to value the benefits

• Consider cross Ministry benefits e.g. health

• Ensure supply-demand decisions are balanced e.g. network operator regulation

• Phased move away from top-down programmes to creating markets for efficiency

• Stable policies

ICP – The future The future

• Strong demand by owners and investors

• Highly skilled and accredited workforce

• A mix of financing products at attractive rates

• Standardized tools for tracking and quantifying savings

• Active secondary market

A healthy European energy efficiency market would have:

Energy financing

Standardized

Mainstream

Large volume

Multiple sources

Standardized

Mainstream

Large volume

Multiple sources

NOT standardized

NOT mainstream

SMALL volume

FEW sources

Standardized

Mainstream

Large volume

Multiple sources

Contact

www.eeperformance.org/europe

steven.fawkes@energyproltd.com

www.onlyelevenpercent.com

@DrSteveFawkes

+44 77 0223 1995

© Steven Fawkes 2014