Divesting is easy – investing in energy efficiency is hard

The divestment campaign, encouraging investors to divest from investments in fossil fuels has always slightly puzzled me but it does seem to be growing in strength.  One issue with it is that if an investor sells their shares in an oil company someone else buys them, the company itself is unaffected unless there are far more sellers than buyers and then the share price will drop to a new equilibrium.  Shareholding is about ownership and the shareholders are the owners of the company, surely a counter strategy to divestment would be to invest more and start taking a tighter control of the asset that you own – the gulf between shareholders and management is a major contributory factor to many corporate ills in my opinion.  If you own 100% of a company (or even a majority) it pretty much has to do what you want which could of course include investing more in alternative energy assets or electric cars or private rockets or whatever you want.

The other issue that the divestment campaign has is that it is predominantly negative and if large investors do divest they then have to find an alternative home for their wealth, preferably one that has the same (or better) risk and reward characteristics that they were seeking by investing in fossil fuel companies.  Clearly there are opportunities to invest in renewable energy and green infrastructure and ultimately of course energy efficiency.  With recent changes in the UK to support mechanisms renewables may not look as attractive as they once did and dependence on government subsidies should now be considered a significant risk factor in all jurisdictions.  This is likely to increase the amount of capital at least considering energy efficiency as an alternative.  Those of us in the energy efficiency business would argue, with some considerable evidence, that there is still massive potential (even at low oil prices), to increase investment into very cost-effective, profitable energy efficiency opportunities which as well as bringing energy cost savings, reduction in exposure to energy price volatility and reduced emissions can also bring significant non-energy benefits such as improved health and welfare.

The problem is not about potential however, it is about how to turn potential into real investment opportunities at scale and there are a number of significant barriers to doing that.

Firstly, as we looked at in a previous post Energy Efficiency as a Resource the fossil fuel industry has a well developed and fairly standardized system for developing and valuing fossil fuel resources and reserves in the shape of the Petroleum Resources Management System (PRMS).  There is no equivalent in energy efficiency although the Investor Confidence Project Protocols (currently available in the US with European versions to be launched soon) are the basis of a similar system for energy efficiency projects in buildings.  Utilization of the Protocols will help standardize the development and documentation of energy efficiency projects which will reduce transaction costs and improve the consistency of technical performance.  They are being used by a growing number of developers, investors and programme managers.  The Investor Confidence Project in the US has also launched a quality management system under the title of Investor Ready Energy Efficiency^SM.  The European Commission has recently launched a project that will work with the financial sector to develop a standard approach to under-writing energy efficiency projects which is likely to build upon on the Investor Confidence Project approach.

Secondly there is very little available data on the actual technical and financial performance of energy efficiency projects.  Many organizations investing in energy efficiency don’t conduct post-investment analysis and even if the performance data sits somewhere in their energy monitoring system (assuming they have one!) it is not readily available without considerable data mining and manipulation.  Host organizations who have used Energy Performance Contracts, or their Energy Service Companies do have data on performance but again it is usually proprietary.  For investors  considering energy efficiency projects there is no  place to get actuarial data on the performance of buildings and projects similar to the ones they are considering.  This is being addressed in the US by projects such as Department of Energy supported Building Performance Database and will be addressed in Europe by a forthcoming European Commission funded project.  In the fossil fuel industry project performance data is easier to get hold of, oil companies revenues are based on oil production and the oil price, capex figures are generally available (at least for public companies) and there are industry forums for benchmarking the capital cost of projects.

Next there is the lack of human capacity within the financial sector to understand, evaluate and underwrite energy efficiency projects.  Investors in and lenders to the fossil fuel industries have considerable human capacity with a deep understanding of the industry, typically they have specialized teams, including people with direct working experience in the industry and access to analysts who really know the sector.  Twenty-five years ago there was no equivalent capacity in the renewables sector, the growth of the renewables industry (particularly wind) has been mirrored (and indeed enabled) by the growth of human capacity in renewables within the financial sector.  There is very little capacity around energy efficiency in the financial sector.  Of course it is only really possible to scale-up human capacity around standardized systems such as those of the Investor Confidence Project and standardized under-writing procedures.  You can’t build teams or companies when every transaction is done in a different way.

Another part of the problem is that compared to fossil fuels and even renewables there is a lack of development capacity and by this I mean specifically the ability to develop large-scale, investable projects.  Large property owners in both the public and private sector lack the technical capacity, and the development finance, which is risky capital at the end of the day, to develop large-scale, multi-property, bankable projects.   In the fossil fuel industry there is a well developed network of project developers ranging from small E&P oil companies, often with very few resources when they start, through to the oil majors.   Building owners and energy efficiency developers tend to work on a single (small) project by project basis or at best an individual building.  A number of factors contribute to this including the small capital cost of efficiency projects, the fragmented nature of the energy efficiency industry and the fact that efficiency is not seen and valued as a resource like fossil fuels or wind power is.

All these problems make investing in energy efficiency hard to do at the moment.  Specialized efficiency funds that have been established in the UK, Europe and around the world are finding it hard to deploy capital.  The development of the Investor Confidence Project and establishment of project performance databases are critical enabling conditions to foster a growth in investment into energy efficiency.  Interest from the financial community and desire to invest in the sector is growing, particularly amongst investors who have previously invested in renewables and now find them less attractive, as well as investors with social and responsible investing objectives.  To convert the potential into reality now requires building capacity in both the demand side, the building owners, the supply side, i.e. the energy efficiency supply chain, and the financial sector.

So if investors want to divest from fossil fuels and invest in energy efficiency they need to put some seed money into solving these problems first.  Just providing project investment funds will not cut it.