One of the most memorable phrases I first heard at the ACEEE Finance Forum in 2012 was that ‘the problem with efficiency financing is that the ratio of conferences to deals is too high’.  That remains true although there are good signs that the ratio is improving, the number of conferences seems the same (or maybe higher) but the number and value of deals is definitely increasing in lots of places around the world. On my recent trip to Bucharest for the 2nd Round Table on Energy Efficiency Financing held under the auspices of the Sustainable Energy Investment Forum I saw more evidence of this change.  The meeting was encouraging because a) several banks were in the room leading the conversation (& deals) and b) there are a now a number of successes to point to.

The first of these was a UNDP Global Environment Facility project which I had a small part in designing when I first went to Bucharest in the 1990s and was implemented from 2003 through to 2006.  This project was executed extremely well with only $2m of UNDP money which supported project development assistance and capacity building, and yet catalysed nearly $70m of private investment into 34 energy efficiency projects, compared to a target of $12.5m and 20 projects.  Although I had not developed my jigsaw of energy efficiency financing back then on reflection the project had the four pieces of the jigsaw, finance (development and project), building pipelines, standardisation, and capacity building within the demand side, the supply side and the finance industry.  The implementing consultants carried out activities in all four areas. Although it is now a long time ago, the project merits study for anyone designing programmes designed to catalyse private investment using a small amount of public money. 

Since the UNDP GEF project there has been a series of EBRD Green Economy Financing Facility (GEFF) facilities that ran between 2008 and 2018; the Energy Efficiency Finance Facility (EEFF) – for private sector industrial companies, the Municipal Fund for Energy Efficiency (MFFEE) – for municipalities, and the Romania Sustainable Energy Finance Facility (RoSEFF) which financed projects in SMEs.  These facilities provided technical assistance to help develop and close projects and used a mixture of grants from the EU (between 10% and 20%) and loans to finance projects.  The EEFF made 129 investments totalling €111m, the MFFEE deployed €10m into three public lighting schemes, and the RoSEFF made 341 investments totalling €69m.  The current GEFF in Romania was launched in 2017 and is a €100m financing framework for the household sector, the first time this sector has been specifically addressed.  Concessional financing is provided by the TaiwanICDF through EBRD to local financial institutions Banca Transilvania and UniCredit Bank and to date $64m has been deployed.  The facility consultant, Tractebel, trains local financial institution branches how to recognise and act upon energy efficiency lending opportunities which builds capacity and ensures extensive outreach throughout the branch network.

The other exciting project is the Romania Green Building Council’s ‘Smarter Finance for Families’.  This project developed a low-cost, local green home certification system in which homes have to achieve an energy performance more than 30% better than an A rated home and have other green features including use of non-toxic materials and reduced construction waste.   Furthermore the scheme links this to green mortgages from major banks which offer lower interest rates for homes certified to the standard.  The programme now accounts for about 10% of total new home building in the country.  This would have been unimaginable back when I worked in Romania in the mid-1990s and is a great achievement by the Romania GBC who are now replicating it in 11 countries with the support of a Horizon 2020 funded project.  Like the other successful projects it has the four elements of the energy efficiency financing jigsaw.

The last time I had been in Bucharest was for the total solar eclipse on 11 August 1999 and after twenty years away it was great to see some old friends and colleagues as well as the big changes in Bucharest, which is a lot more pleasant to be in than it was back then.  There is a lot of building rehabilitation underway, rehabilitation that has to improve earthquake resistance as well as thermal performance.  Much work needs to be done to increase the flow of capital into increasing the performance of the building stock in all aspects but that applies everywhere. The country is moving in the right direction and the continuing dialogue between banks and other stakeholders catalysed by events such as the Roundtable, coupled with the available tools such as the Romania Green Building Council standards, the Investor Confidence Project, the EEFIG Underwriting Toolkit and the Derisking Energy Efficiency Platform (DEEP), will help accelerate the trend. 

Although I greatly enjoy speaking at conferences our real work is working to improve the ratio of projects to conferences – that is getting more investment into energy efficiency.  If you share this mission and want to discuss how EnergyPro can help you let me know.

Infrastructure and sustainability

Ultimately the multiple environmental and social challenges  – not only climate change but dangerous air pollution, ocean acidification, providing modern energy to those without it, and feeding a growing population just to name a few – which are addressed by the Sustainable Development Goals – all come down to our choice of infrastructure and its design. In this context infrastructure is not exactly the same meaning as the traditional definition of infrastructure used by investors but there is close overlap. 

Our existing infrastructure in the domains of energy, the built environment, transport, and agriculture, was designed and built in a different age with different levels of technical know-how, a very low knowledge of and consideration of human impacts on the environment, and a very different set of social and economic parameters.   Existing infrastructure, for example large centralised fossil fuel burning power plants, our electricity distribution system and our built environment, were designed the way they were designed with the level of available technology, in the economic circumstances and the regulatory and institutional set-up of the time.   

Much (most) of it is no longer appropriate for today’s world and the need, and desire, is to address the Sustainable Development Goals. We now have much expanded technical capabilities, expanded knowledge and consideration of environmental and social impacts of our choices around infrastructure, and different economic and social drivers.  Information technology and the availability of data are breaking down barriers between infrastructure silos – for example everyday buildings can be power stations and cars can become electricity storage devices.

Given the long life of infrastructure investments we need to be making different choices that result in smarter, more resilient, greener, higher performing infrastructure.  We also need to ensure that current infrastructure projects do not lock in poor environmental performance, doing so risks making environmental problems worse and assets becoming stranded. The combination of technology and infrastructure – “Infratech” – gives us enhanced ability to make different choices.

Infratech

Infratech has been described as “the deployment or integration of digital technologies with physical infrastructure to deliver efficient, connected, resilient and agile assets. This combination of physical and digital infrastructure designs and produces assets that respond intelligently, or inform and direct their own maintenance, use and delivery.  These assets may also be automated and responsive to real-time or historical data. This produces benefits not only for the developer/operator, but also to the end-user in terms of efficiency, productivity and a better overall experience.”  Investors are now more interested in the characteristics of infrastructure investments rather than the old definitions. The characteristics of high performance infrastructure are that it is effective in its main mission, smart, green, resilient and produces other social benefits.

Infratech covers all infrastructure domains including:

• Energy generation and distribution
• Built environment
• Transport
• Water and waste
• Food production
• Resource extraction, processing and use
• Communications
• Health and well-being
• Life safety systems.

and can include many types of technology including amongst others:

• digital monitoring and control systems
• e-commerce systems
• smart materials. 

Combining technology and infrastructure can produce higher performance assets that are more effective, more efficient, smarter, greener and more resilient.  Infratech can increasingly integrate these domains through the availability of data and control, changing economics and new business models. 

To achieve the ambitious but essential SDGs we need to use Infratech to improve the quality of infrastructure investments, so that they contribute directly to the SDGs, and increase the rate of investment in smarter, greener, more resilient infrastructure.

We like working with companies doing just that and welcome conversations about how to maximize the growth of Infratech across all domains, not just energy, through informing, innovating, incubating or investing.

‘Every investment is an impact investment’

Amy Clarke, Tribe Impact Capital

I have been thinking a lot about impact investing since speaking at the King’s Impact Investing Society conference at the end of January.  There still seems to be a lot of debate about definitions but it seems clear that impact investing is any investment which is aimed at achieving a positive impact on some societal problem as well as a financial return, personally I think of it as investing to have a positive impact on sustainability.  Then the question of how to benchmark and measure that impact arises. The Sustainable Development Goals (SDGs) are a good roadmap to all the areas where we need to improve sustainability – across environmental, social and economic spheres – and can form the basis of measurement. Impact investing aims to have a positive impact on key sustainability problems as well as make a return, it is not philanthropy.  At the King’s conference Amy Clarke, the founder of Tribe said, “every investment is an impact investment” and that is correct – every investment has multiple impacts in the areas covered by the SDGs, some good, some bad, some intentional and some unintended. Impact investing is about focusing on making a positive impact as well as a financial return.

The question, that for so long has not been asked, and which impact investors ask, is what is the impact of this investment on the non-financial factors such as the environment, gender inequality, access to basic services or whatever areas the investment affects. Taking a systems view, we need to ask what is the totality of all the impacts of the investment?  An impact investment should be positive in its impact on at least some of these factors. Important questions include; what is the base line for comparison, what are the targets and how do we measure progress?  The SDGs are a set of global targets covering all aspects, economic, environmental and social and provide an overall context.  Various initiatives to define and measure impacts now exist and are beginning to be applied more often.  The Impact Management Project, which grew out of a project by Bridges Fund Management is one emerging global impact measurement tool.

Of course financial investors are not the only decision makers who have impact.  Managers of organisations make decisions every day, small and large that have multi-dimensional impacts – whether they be decisions on which mode of travel to take or decisions to build a new factory or develop a new product.  A systems based approach to investment appraisal should cover the non-financial impacts, both good and bad.  To what extent and how do organisations that have environmental goals factor this into every decision?  Appraisal of capital investment and the way it is taught and practiced is almost entirely focused on the financial aspect and yet we know that other non-financial factors can be more strategic and therefore important.

Consumers make purchase decisions every-day that have impacts – often impacts in distant and remote parts of the world in some part of the long supply chains, impacts that can be negative in various aspects when viewed against the lens of the SDGs.  Systems that bring greater transparency of the impacts to consumers have emerged but we need a lot more of them such that consumers can factor them into their decisions.  How can we measure and communicate the wider impact of relatively small purchase decisions to consumers?

Impact investing is growing in volume and this is a really positive trend but we also need to think about, and talk about impact managing and impact consuming.  Every investment decision, every management decision and every purchase decision has multiple impacts.

EnergyPro works to identify, develop and implement impact investment opportunities, particularly in support of the energy transition but also in other dimensions of sustainability.  We also work with organisations to help them make more impactful decisions.

If we can help you in these areas let us know.

Steve Fawkes speaking at King’s Impact Investing Society Conference 2019

Although there is still a lot to do to deliver the transition to a cleaner, low carbon, more flexible energy system, it does sometimes feel that the seismic plates in energy have shifted and that the outcome is inevitable. That should not be taken to mean we can relax – not only is there a lot to do to deliver existing and new technologies, business models and regulation – we still have to combat the resistance of the old guard who as in any paradigm shift spread confusion and fight to hang onto their positions.  However the other dimensions of improving sustainability cannot be ignored. Earlier in the year we saw the report on how “rapidly declining insect populations could threaten the collapse of nature” which reminded me of the book “Wilding” which I read recently.

‘Wilding’, which I highly recommend, tells the story of Knepp Castle Estate in West Sussex which since 2001 has switched from traditional intensive (and unprofitable) agriculture to rewilding which has resulted in an incredible increase in biodiversity.  The approach is to establish a functioning ecosystem and let nature get on with it – rather than target specific goals or species.  Knepp has seen great increases in bio-diversity and become a breeding ground for several species that were absent or in severe decline including, purple emperor butterflies, turtle doves, nightingales and 13 out of the 17 UK resident species of bats.

Rewilding Britain define rewilding as follows:

Rewilding is the large-scale restoration of ecosystems where nature can take care of itself. It seeks to reinstate natural processes and, where appropriate, missing species – allowing them to shape the landscape and the habitats within.

Rewilding encourages a balance between people and the rest of nature where each can thrive. It provides opportunities for communities to diversify and create nature-based economies; for living systems to provide the ecological functions on which we all depend; and for people to re-connect with wild nature. 

https://www.rewildingbritain.org.uk/rewilding/

Attaining greater sustainability requires ensuring we have food supplies as well as protecting the environment, objectives that can clearly be in opposition to each other. The food production system is essential infrastructure, although it is not usually characterised as such.  As in other areas of infrastructure we are seeing a shift towards digitisation, we are also seeing a shift towards production of food in controlled environments.  Like producing buildings, producing food in a controlled environment rather than out on site makes a lot of sense and the ability to control environments, possibly in an urban location, can raise productivity as well as reduce resource input for production and transportation.

The idea of the environment created by large-scale farming as being somehow natural, an idea we all grew up with, is clearly wrong – the agricultural environment is as man-made as the inner city and maybe it is largely incompatible with truly protecting nature.  The combination of food production in a controlled environment and rewilding provides a clear direction of travel.  We need to greatly ramp up food production in controlled environments, out of the field and into the converted warehouse, and then rewild former agricultural land.

Our vision should be healthy food for all produced in controlled and efficient environments enabling large areas of the land and seas to be rewilded.

This blog previously appeared in Project ABRACADABRA newsletter in January.

The beginning of a new year is always a good time to take stock of where we are in achieving our objectives in life and what we need to change to make greater progress.  The same is true for energy efficiency and building renovation so let’s begin by looking at where we are.

The good news from the International Energy Agency’s 2018 Energy Efficiency Market Report[1] is that global investment in energy efficiency grew by 3% to reach USD 236 billion in 2017, although the rate of investment growth slowed in all sectors which is a concern.  Europe remained the largest source of investment, rising by 1%.  Buildings accounted for 59% of total investment.

The challenge is that we have to do much better and greatly increase the investment into efficiency. To realise the IEA’s Efficient World Scenario (EWS), one in which carbon emissions fall, we need to double the average rate of investment between 2017 and 2025 to USD 584 billion a year, and then double the average rate again between 2025 and 2040 to USD 1,284 billion a year.  The cumulative investment between now and 2040 in the EWS is USD 24,514 billion.  Table 1 summarizes the investment levels required in the EWS.

Table 1. Investment into energy efficiency required in the IEA Efficient World Scenario

According to the IEA 30% of the total investment will have to go into buildings and 30% of that will be in the EU, suggesting some USD 2.2 trillion would need to be invested in EU buildings between 2017 and 2040.  Various EU studies show the size of the potential and the problem in Europe.  With 35% of the EU’s buildings over 50 years old and the slow replacement rates, the renovation potential in the EU is huge, some 110 million buildings[2] could be in need of renovation.  The total costs could be in excess of EUR 1 trillion.  So we know what the target is but current levels of investment are much lower than where we need to get to.

Another positive development in recent years is that financial institutions are beginning to recognise the value and potential of energy efficiency.  For many years it was ignored but the pioneering 2015 report of the Energy Efficiency Financial Institutions Group (EEFIG), convened by the EC and the UNEP Financial Initiative, as well as work by the G20 and others have increased interest – over 100 banks and financial institutions from more than 40 countries signed up to a statement that they acknowledged the unaddressed financing opportunities, would contribute to scaling up energy efficiency financing, and further embed energy efficiency principles into the way they engage with clients.

In more good news green banks around the world have increased their annual allocations for energy efficiency.  In the expanding green bond market, worth USD 161 billion in 2017, energy efficiency’s share of the disclosed uses of funds increased from 18% to 29%.  In the US the use of Property Assessed Clean Energy (PACE) financing is also growing and by mid-2018 nearly USD 5.9 billion in energy efficiency measures had been financed by PACE programmes in the US, covering both residential and commercial buildings (C-PACE) but with 90% in the residential sector.  PACE is being introduced to Europe by the Euro-PACE project[3].

As energy efficiency specialists and advocates we must pull all the levers we can to increase the levels of investment to those in the Efficient World Scenario as it is clear that the outcome will be a much better world, with falling carbon emissions, reduced air pollution, less fuel poverty, improved health and many other benefits.  Increasing the levels of investment into energy efficiency on this scale is undoubtedly a challenge, but I believe that we are now beginning to understand the barriers and the levers that we can pull to achieve it.  We need to really acknowledge the problems with efficiency as an investment and address them.

Those of us who advocate for improved levels of energy efficiency regard it as special for several reasons; it is the cleanest and often cheapest way of providing energy services, it offers high return, rapid payback projects which are often not implemented for a variety of organisational and structural reasons. However, we need to recognize a fundamental truth and that is for the rest of the world energy efficiency is not special at all – in fact it is boring.  Energy is usually a small cost line for most building owners and operators.  Also for senior managers making investment decisions there are many other more pressing decisions which are linked to the organisation’s core business, energy efficiency will always be lower priority than basic maintenance, production or marketing.

We do know that there are massive opportunities to improve energy efficiency in all areas especially buildings.  Many, many examples from Europe and the rest of the world show that buildings can be retrofitted in ways that can reduce energy use by 30%, 50% or even 80%.  Net zero energy use is the ultimate goal and is achievable but at significant cost.  The European Buildings Performance Directive requires all new building to be Near Zero Energy Buildings (NZEB) by 2020.  For existing buildings we need to recognise that the energy savings alone will not pay for the investment needed to get to anywhere near NZEB performance.  We also need to recognize that building refurbishments happen at certain points in the building life-cycle, refurbishing on energy grounds other than as part of a major refurbishment is not likely to be optimal or even viable. We also need to learn how to build and present better business cases to decision makers.

For a financial institutions looking to invest in energy efficiency projects there are a number of barriers including:

• The fact that the economic benefit is a saving – a counter-factual compared to what would have happened without the investment.
• Energy savings are hard to measure – unlike energy production projects where you can meter output and charge a client accordingly.
• A lack of data on the outcomes of projects.
• Projects are usually very small and need to be aggregated.
• Balance sheet treatment of assets which are integrated into buildings can be an issue.
• There is a lack of standardization in the way that projects are developed and documented – financial institutions require standardization.
• Financial institutions lack capacity to assess energy efficiency projects – despite the high level commitments from many financial institutions at the operational level there is a lack of understanding and knowledge about energy efficiency.

These barriers within organisations and within financial institutions help explain why there is such a big gap between the potential and what we are achieving.  These problems are beginning to be addressed in a number of ways.

Standardization is addressed by the Investor Confidence Project[4] with its project Protocols and independent quality assurance system which certifies projects as Investor Ready Energy Efficiency™.  Standardization also helps aggregate projects.

The lack of data on projects is being addressed by the EEFIG database DEEP[5] which contains data on over 10,000 projects across Europe.  Financial institutions can now review projects by sector, type and geography and hence build their confidence in the sector.

The lack of capacity in the financial sector is addressed by the EEFIG Underwriting Toolkit[6] which provides a common approach to assess the value and risk of energy efficiency projects.  It also provides a common language that project owners, project developers and financial institutions can use, something that has been sorely lacking.  The newly reconvened EEFIG will be doing more work to spread the use of the Toolkit and build upon it as a training tool.

Better business cases need to be built but they need to go far beyond just energy savings. We now know that energy efficiency projects bring multiple non-energy benefits including things like increased productivity, increased occupant satisfaction, improved health outcomes and increased asset values.  We need to recognise that all of these are much more interesting to decision makers than some energy cost savings and value them in our investment decisions.  Valuing multiple benefits is the focus of Horizon 2020 funded project Multiple Benefits[7].

The ABRACADBRA[8] project is a specific case of utilising multiple benefits to build better business cases.  It is focused on utilising volumetric additions such as façade additions or rooftop extensions which can add value to tenants and building owners and help finance near zero energy refurbishments.  Having more space and amenities such as sun rooms is a real benefit to tenants and owners that is highly attractive, and the added real value they bring to the property can be used for financing improvements.

Although we have only recently started on the journey of increasing investment into energy efficiency we are already seeing the pieces of the jigsaw emerge.  To reach the investment levels in the Efficient World Scenario and reap all the economic, environmental and social benefits that would bring, we need to put all the jigsaw pieces together into platforms that develop and implement projects that meet the needs of financial institutions and enable investment at scale i.e. in the billions rather than the millions.  There are grounds to be optimistic.

[1] Energy Efficiency 2018. International Energy Agency, 2018. https://www.iea.org/efficiency2018/

[2] Boosting Building Renovation: What Potential and Value for Europe. European Parliament. 2016. http://www.europarl.europa.eu/RegData/etudes/STUD/2016/587326/IPOL_STU(2016)587326_EN.pdf

[3] EuroPACE. Funded by Horizon 2020 grant number 785057. http://www.europace2020.eu

[4] Investor Confidence Project Europe. Funded by Horizon 2020  grant numbers649836 and 754056. http://europe.eeperformance.org

[5] De-risking Energy Efficiency Platform. https://deep.eefig.eu

[6] EEFIG Underwriting Toolkit. https://valueandrisk.eefig.eu

[7] Multiple Benefits. Funded by Horizon 2020 grant number 785131.  https://www.mbenefits.eu/why-multiple-benefits/improving-competitiveness/

[8] ABRACADABRA. Funded by Horizon 2020 grant number 696126. http://www.abracadabra-project.eu