ESTA invited me to make a keynote address at their UMR Conference in Birmingham on 10^th October 2017.  Thanks to ESTA and the attendees for the opportunity and the questions.  As usual this written version represents a tidied up and more coherent version of what I actually said on the day. 

First of all I am always pleased to be back in Birmingham because it is where I took my undergraduate degree and first studied energy matters.  Secondly I am pleased to be in Birmingham as last week I was supposed to be presenting in Barcelona but I don’t like going into cities with civil unrest, fortunately Birmingham is not quite ready to declare independence but given the crazy world we live in now let’s give it a few years and see what happens.

I was given this title and my first reaction was that it was very different to what I normally talk about – the Investor Confidence Project, energy efficiency financing and making efficiency more investable.  And then I realised that those topics are very much related to addressing the issues of energy security, energy efficiency and fairer bills and I should use the opportunity as if I was giving advice to government.  I should start out by saying – with apologies to any government representatives in the room – I often find giving advice to governments, and I am not just singling out the UK here, a case of banging your head against a brick wall, I can only do it for so long and then I have to stop for a while.

I know we live in a “post-factual” world but let’s start by looking at some facts, many of which are still shocking and which demand a strong response.  These are facts that will impact on the global, European and UK energy situation over the coming years and decades, facts that need to be considered when formulating policy.

• The EU spends more than €1 billion a day importing energy. It was up to €500 billion a year but the fall in oil prices has helped a bit.
• Fossil fuels are still dominant globally. Despite rapid gains for renewables, fossil fuels still account for 80% of global primary energy use.
• The US spends about $280 billion a year on US Navy power in the Gulf region, essentially protecting the flow of oil. That works out at about $83 a barrel and yet only 20% of the total flow goes to the US, a percentage that is declining as the US becomes more self-sufficient. In a world with an isolationist US government (if it is isolationist today according to the latest tweets), you have to question how long that may continue.
• In 2016 the Kingdom of Saudi Arabia, a country I have been fortunate enough to get to know over the last few years, produced c. 10.5 million barrels of oil a day and exported c.7.6 million barrels a day. Some projections show that by 2035 domestic demand in Saudi Arabia could equal production.  Needless to say if this ever happened it would have very significant effects on the oil market and Saudi Arabia. This is undoubtedly being taken very seriously within the Kingdom.
• Russia supplies 34% of gas used in the EU, a situation that the EU expects to continue for “at least 2 more decades”. That is a major geo-political strategic risk.
• When we look globally we see huge economic growth, particularly in China, India and S.E. Asia with projections that there will be an additional 3 billion middle class by 2030. That will be a huge achievement and very welcome, but we know that when people become middle class their demand for energy kicks up dramatically as they start to buy all the energy using devices we take for granted.
• There are an estimated 2 million premature deaths a year globally, a result of burning fossil fuels. In the EU the number is estimated at 300,000 and in the UK 50,000.  This problem is not being addressed effectively, I think all parts of London now exceed “safe” limits on particulates so we have gone backwards, mainly because of the promotion of diesel cars.
• Globally 1.3 billion people are without electricity. There are great strides being made on this, again India stands out as a good example.  We need to get everyone using electricity, the benefits in education and health are huge.
• On the issue of climate change, the IEA and IRENA estimate that to achieve their “66%, 2°C” scenario the investment into energy efficiency has to be increased to an average of > $1 trillion a year, a five-fold increase on current levels.

Jumping back to the UK:

• the UK imports just under 40% of its energy supplies and at the peak in 2012 the financial cost was £24 billion – more than £460 million a week. Perhaps we should put that on the side of a bus.  Although things are now moving in a better direction this is still very concerning.
• We know the UK electricity system is facing “unprecedented challenges” in terms of supply margin.
• We have Hinkley Point C which is an unproven technology which is already late – no surprise there. Also apparently we need the Chinese to finance reactors. I was bemused to read a report this morning that government officials testified to a committee that the decision to build it was “the best value option”.
• We still have not resolved fuel poverty after years of talking about it. We have 4 million people including 1.5 million children living in fuel poverty which costs the NHS £850 million per year.
• We know that there is a massive, cost-effective energy efficiency potential, equivalent to 22 power stations according to the government. However, despite many successes, we still only scratch the surface of the economic potential.  We all know of projects that don’t proceed despite great paybacks, paybacks that we would all be happy with in our own investments.
• On the positive side, solar is rapidly becoming economic without subsidy, not just in the UK but globally.
• We are also seeing great reductions in the price of storage, particularly batteries, that will dramatically change the energy scene. Projects like the famous Tesla giga-factory are starting to have an impact.
• In transport EVs are making an impact much faster than many, including myself, would have predicted. Next month will see the launch of Tesla’s electric “semi” truck and electrification can offer rapid paybacks in selected freight transport segments. I recently heard of a company working on marine electrification for ferries. That is a great application I would never have thought of, there is a predictable duty cycle and there are less space constraints and technical issues than in cars.
• As well as the falling price of solar and batteries we are seeing a fall in the price of energy efficiency. The most obvious example, but not the only one, is the price of LEDs.  This slide was shown by the Indian Prime Minister last week and it highlights the work of Energy Efficiency Service Ltd (EESL) who have aggregated demand and bought the cost of an LED lamp in India down from c.$7 to c.70 cents in a very short time by aggregating demand.  EESL is now applying that experience to other technologies and other countries including the UK, and I am proud to say that my company EnergyPro is their JV partner here.
• All of this change has had a massive effect on traditional utilities. There have been massive financial losses – €0.5 trillion (yes trillion) according to the Economist in 2013 (and more since then) – and big restructurings.  All utilities are looking for new business models, if they are not then they are finished.
• The effect of solar on the grid is the same everywhere. The arrival of what the Americans call “the duck curve” is being felt in all electricity systems where solar is being deployed i.e. all systems.  The duck curve is a rapid reduction in net load during the day as solar output climbs coupled with a steepening of the load curve in the evening as solar output falls away, a steepening that is increasingly hard to match with conventional generation technology.

Given these facts (and many others we could talk about) we need to take a new perspective on energy and energy efficiency.  If we don’t we will continue to bang our collective heads against the same brick wall over and over again, and energy efficiency will continue to under-perform.

So, what is the “traditional” view of energy efficiency? I would summarise it as follows:

• efficiency is something that is tacked onto the end of energy policy. Politicians talk about energy, finish by saying “don’t forget about energy efficiency” and then promptly forget about it.
• it is “good for you” in the same way that cold showers are good for you.
• it has uncertain outcomes – one of the reasons people don’t invest in so-called “low hanging fruit” is that they are not convinced they will get the promised results.
• it needs to be encouraged by mandates or subsidies.
• it is hard to invest in.
• it is somehow different to other markets – there are “market failures”.
• it is often a “calling”, a “campaign” or a “crusade”.
• for most people, most of the time, it is really, really boring.

The new and emerging view of energy efficiency is one in which:

• it is central to energy policy.
• it is a Distributed Energy Resource (DERs) like other DERs such as local generation & demand response.
• it can be reliably dispatched with quantified and known risks.
• it can be aggregated.
• it can be contracted for using standard contracts that look like Power Purchase Agreements.
• it can easily be invested in.
• it can be priced per kWh like any other energy resource.

So how do we actually make this view mainstream?  We have to create a true market for energy efficiency.  At the moment we talk a lot about “the market for energy efficiency” but there is no market for energy efficiency, there are only markets for stuff such as LEDs, boilers, controls, heat recovery etc.  You can pick up the phone or go on-line and buy energy, but you can’t buy energy efficiency, only stuff and stuff with uncertain outcomes.

To make a market, any market, we need several things; a system of weights and measures, standardization of product, and standard contracts with penalties for non-delivery.  If you look at any market, whether it be apples, or sophisticated financial derivatives, these factors are present.  The good news is we now have the technologies to make a true market for energy efficiency.

This is now starting to happen in California and spreading to other US states. In California it was driven by new legislation that increased renewable and energy efficiency targets and required a switch from deemed savings to metered savings, combined with pay for performance models.   Once you make that change it enables a number of things including:

• contractors can pick their business model and technology. If a contractor can save energy through awareness campaigns then they can be rewarded just as if they had invested in LEDs.
• contractors have to perform, or they go out of business.
• a programme administrator or a procurer of energy efficiency can compare the performance of different contractors.
• multiple small projects can be aggregated and demand capacity sold into the grid.
• the grid operators can enforce the same kind of non-performance penalties on energy efficiency they can on energy supply options.
• a market can be established by utilities setting a resource curve and procuring efficiency in the same way they procure energy supply, with metering, a high degree of certainty in the outcome and penalties for non-performance.
• reverse auctions can be held that set the price for the various energy efficiency resources. For those that are not economic, e.g. fuel poverty programmes or encouraging deep retrofits, governments can add a payment on a price per kWh basis to drive the real outcome they want.
• energy efficiency projects can be financed through project cash flows rather than on the balance sheets of project sponsors, therefore becoming just like every energy generation project.

So if government, any government, should ever ask my advice in future this is what I would say:

• avoid chasing the latest shiny bright thing (this months being Small Modular Reactors).
• treat energy efficiency as a resource like any other.
• support the establishment of energy efficiency weights and measures.
• require that energy efficiency is metered not
• support Pay for Performance models – don’t pay for stuff, pay for results.
• add programme support for situations that are not economic but desirable g. fuel poverty & NZEBs but pay for performance and not stuff.
• encourage innovation only by paying for performance – don’t worry about the technology – only the performance.

I was honoured to be presented with an ACEEE Champion of Energy Efficiency Award in Denver, Colorado on 17th August.  Here are my remarks on accepting the Award at the ACEEE Industry Event.

Thank you very much for this award.  It is a great honour to be given an award by the ACEEE as most of my work is outside the US and I am a big fan of the work of ACEEE. When I flew over for this I wasn’t expecting to have to make an acceptance speech so I was very surprised when I read in the programme “presentations by award winners”. When I asked Ethan for advice, he suggested talking about how I got into energy efficiency and something about the industry.

Well, it may not surprise you that when I was asked, “what do you want to be when you grow up?” as a child I did not say, I want to go into energy efficiency. I actually wanted to be an astronaut but growing up in UK in the 1970s that didn’t seem a viable career move. Then in 1974 in the U.K. we had something called the three day week. This meant that industry only got electricity three days a week, TV finished early, households had rolling power cuts, and even the pubs closed early. This was all due to a strike by coal miners, but it came on the back of the first oil crisis and the two combined seemed to foretell some dystopian future where energy was in short supply. I decided then that energy was a really important area to work on and particularly energy efficiency and renewable energy, which back then was called alternative energy. When I left school I took one of the first ever degrees focused on energy. Then after working a year as an energy auditor I was invited to do a PhD about the potential for energy efficiency in British industry. I have to tell you I had no intention of doing a PhD, but this was a unique opportunity as it was based in industry. Furthermore one of the industries I focused on was brewing. So I spent much of my PhD in breweries and in those days workers in breweries could drink at lunch time – something long gone because of Health and Safety rules. So all in all it was a hard PhD to turn down. It is worth noting that brewing has always been central to energy efficiency and thermodynamics – John Prescott Joule who did the early work on thermodynamics was the son of a wealthy brewer and his early work was all about saving money on energy costs – only later did he work on the theory.

So that is how I got into energy efficiency. I suppose the other question is why did I stay with it so long. There is a lot of talk of barriers in energy efficiency and I suppose I have banged my head against every one of them over the years. I was probably too pig headed or too stupid to stop banging my head against barriers. There is also a more subtle and important explanation and that is about purpose. I think that improving energy and resource efficiency or productivity is the key challenge of our times and a worthy purpose to pursue. We know that we need to generate much more wealth, that is the only way to resolve problems of poverty and ignorance, here in the US, in Europe and in every corner of the world. Fundamentally we have to make everyone rich. In the past of course, and the not too distant past when I was a student, the prevailing truth was that increasing GDP meant increasing energy usage. Since the industrial revolution, wealth creation has been based on extracting more and more resources with all of the negative impacts that brings. It is clear now that despite the views of some people in Washington that model is bankrupt. Incidentally I read yesterday that in Washington the administration is following a BAY policy – Business As Yesterday.  Despite the views of the current administration it is clear that the next mega-wave of wealth creation is about increasing the efficiency of energy and resource use – decoupling GDP growth and energy and resource use – something we have started to see in energy use in Europe and the USA. Energy efficiency is clearly at the heart of that change.

What keeps energy efficiency interesting as a career is seeing how far can we go? When you have worked on the problem as long as I have you get a historical perspective. In 1976 Amory Lovins published “Energy strategy: the road not taken” in which he described “soft energy paths” and in the UK in 1979 Gerald Leach published “A low energy strategy for the UK”.  Both of these were considered wildly optimistic at the time and widely panned by analysts, the energy industry and government agencies.  History shows that they turned out to be more accurate than any official government or energy industry scenario.  As I said in the title of a blog; “Surprise, you are living in a low energy future”.  What is more, we achieved that low energy future without really trying, except perhaps for a ten year period starting in the mid-to late 1970s.

Being an optimist I think that the six powerful drivers of change; policy, economics, technology, the interest of institutional capital, new business models and market infrastructure will continue to drive advancements in energy efficiency, and over the next 30 to 40 years we will achieve a much more efficient future than we think possible.  At the end of the day our level of energy efficiency is simply a matter of choice.  Given all the global and local pressures choosing anything other than a very low energy future makes no sense.  In fact when we consider the global environment a famous phrase from the space programme comes to mind, “failure is not an option”.

I want to finish with one more space related quote. When Apollo 11 was coming back from the moon the crew held a final in-flight press conference where they talked about the meaning of the moon landing.  Michael Collins the Command Module Pilot, likened Apollo 11 to a submarine’s periscope – all you could see was the capsule and the crew but underneath that was a huge support structure that made it all possible.  I often think that our careers are like that – all you see is the individual’s achievements but in fact they are supported by many, many people, some remembered, some forgotten – family, friends, teachers, mentors, bosses, team members, clients and many, many more.  I would like to thank all those people who have contributed to my career, past, present and future.

Thank you again to the ACEEE for their great work and thank you very much for this award.

17^th August 2017

This is the first in a series of blogs based on and picking up key elements in the EEFIG Underwriting Toolkit which was published in June. The Toolkit aims to equip financing institutions to better value and assess the risks of energy efficiency projects. 

There are four reasons why financial institutions should consider deploying capital into energy efficiency:

• energy efficiency represents a large potential market. The IEA estimates that in 2015 global investment in energy efficiency was USD 221 billion with approximately USD 32 billion being financed through explicit energy efficiency mechanisms such as Energy Performance Contracts or green bonds.  To achieve our climate goals this level of investment needs to grow to circa USD 1 trillion per annum by 2050 and the provision of finance can help overcome some of the barriers to energy efficiency investment.
• reducing risks in two ways. Firstly, increasing energy efficiency improves the cash flow of clients, thus reducing their risk. Secondly there is the risk of financing assets that become stranded as energy efficiency regulations are tightened. For example, in England & Wales it will become unlawful to lease a commercial building with an Energy Performance Certificate rating below E on 1st April 2018.  This puts owners of low performing buildings, and their lenders, at risk.
• improving energy efficiency has a direct impact on reducing emissions of carbon dioxide and other environmental impacts such as local air pollution and therefore should be a key part of Corporate Social Responsibility (CSR) programmes. Energy efficiency is regarded as one of the key pathways to reducing greenhouse gas emissions.
• bank regulators are increasingly looking at climate related risks. Actions include asking banks to disclose the climate-related risks of their loan portfolios.  In France disclosing climate-related risks is already required by law.  This will allow financial institutions to be better informed about loan performance and thus the cost of risk and carry out better risk appraisal.  Possible future actions may include reducing capital reserve requirements for “green” financing.

Each of these four factors are considered in more detail below.

A large potential market

The IEA estimate that that in 2015 total global investment into demand-side energy efficiency was USD 221 billion, USD 118 billion in buildings, USD 39 billion in industry and USD 64 billion in transport.  Investment into energy efficiency was less than 14% of total energy sector investment but increased by 6% in 2015 whereas investment into energy supply fell. The US, EU and China represent nearly 70% of the total investment into efficiency.  Total investment into efficiency can be split into “core” investments, where the motivation is specifically to achieve energy savings, and “integrated” investments which are the regular transactions in which energy efficiency is not the motivation but which improve efficiency because the new product is more efficient than the one it replaces.

To date about 85%, of all energy efficiency investment has been financed with existing sources of finance or self-financing rather than specific energy efficiency products or programmes.  The global market for Energy Performance Contracts, which are most often associated with external financing, was USD 24 billion in 2015 and of this USD 2.7 billion was in Europe.  In addition, about USD 8.2 billion of green bonds were used to finance energy efficiency.

In order to achieve climate targets the level of investment in energy efficiency, and the level of energy efficiency financing, will need to increase substantially.  The IEA and IRENA estimate that to achieve their “66% 2°C” scenario cumulative, global investment in energy efficiency between 2016 and 2050 will need to reach USD 39 trillion of which USD 30 trillion would be in the G20 economies, implying a global level of c.USD 1 trillion a year compared to the current level of USD 221 billion – a five-fold increase.

The business opportunity for financial institutions falls into two categories:

• creating new business lines for specific energy efficiency projects e.g. specific energy efficiency loans, mortgages or funds.
• ensuring normal lending and investing which is being used to finance projects where energy efficiency is not the primary objective, e.g. building refurbishments or production facility upgrades, is leveraged to ensure funded projects achieve the optimum cost-effective levels of energy efficiency which are usually higher than “business as usual” levels.

Energy efficiency projects often have rapid paybacks.  In EEFIG’s DEEP (Derisking Energy Efficiency Platform) database, which includes over 7,500 projects, the average reported paybacks are 5 years for buildings and 2 years for industrial projects. Despite this economic attractiveness many potential projects do not proceed because of other priorities of the other project host, lack of internal capacity to develop projects, or shortage of investment capital.  Furthermore, normal investments in building refurbishments and industrial facilities or new buildings and facilities often do not utilise all of the cost-effective potential for energy efficiency.  The provision of third party finance through business models that reduce the overall cost to the host is an important way of overcoming some of the barriers to improving energy efficiency and represents a major business opportunity for financial institutions.

Reducing risk

Energy efficiency investments can reduce risks for financial institutions in two ways:

• assisting individual clients, whether they be businesses or individuals, to reduce their energy costs improves their cash flow and profitability, as well as increasing their resilience to energy price rises. Reduced expenditure on energy translates directly to improved cash flow which improves the affordability of loans or mortgages, thus lowering risks to the lender.
• Tightening regulations around energy efficiency, particularly buildings such as Minimum Energy Efficiency Standards, mean that it will become impossible to rent or sell energy inefficient buildings. This is a stranded asset risk for the owner and lender.

Increasing levels of energy efficiency, essentially reducing the amount of energy used for any activity, is a central part of European policy to address concerns about energy security and climate change.  European policy is driving tighter energy efficiency regulations for buildings, equipment and appliances as well as vehicles.  The main EU policies are the Energy Efficiency Directive (EED) and the Energy Performance of Buildings Directive (EPBD) and in November 2016 the European Commission, in its Winter Package, “Clean Energy for all Europeans”, proposed further tightening of energy efficiency regulations.

Some member states have implemented Minimum Energy Efficiency Standards (MEES) (also known as Minimum Energy Performance Standards (MEPS)) which mean that after a certain date buildings with an energy efficiency below a set level cannot be sold or rented. These regulations mean that significant proportions of existing real estate portfolios could lose their income and asset value if they are not upgraded to a higher level of energy efficiency.  For owners of large property portfolios, or banks lending to property owners, this represents a significant risk which needs to be addressed.

The environmental impacts of energy efficiency

For many years advocates of energy efficiency have argued that it is the lowest cost source of energy services and a low-cost route to achieving significant reductions in greenhouse gas emissions. This has now been recognised both by policy makers and by many financial institutions.  The projects in EEFIG’s DEEP (Derisking Energy Efficiency Platform) database suggest that the median avoided cost of energy is 2.5 Eurocents/kWh for buildings and 1.2 Eurocents/kWh for industry, which is lower than generation costs.  Energy efficiency has been described as “the linchpin that can keep the door open to a 2°C future”.  The IEA estimates that in achieving a 2°C scenario energy efficiency must account for 38% of the total cumulative emission reduction through 2050, while renewable energy only needs to account for 32%.  For financial institutions looking to make a positive impact on resolving environmental problems as part of Corporate Social Responsibility programmes supporting energy efficiency should be a high priority.  As well as reducing emissions of carbon dioxide that drive global climate change, reducing energy consumption can also have a positive effect on local air pollution.

Energy efficiency and financial regulators

Financial regulators are taking an increased interest in systemic risks including climate change.  There is also a growing interest from regulators and governments in encouraging the growth of “green finance”.  The European Systemic Risk Board in its Scientific Advisory Committee report of February 2016, “Too little, too sudden”, warned of the risks of “contagion” and stranded assets if moves to a low carbon economy happened too late or too abruptly.  The report’s policy recommendations including increased reporting and disclosure of climate related risks and incorporating climate related prudential risks into stress testing.

In December 2016, the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD) published its recommendations which included disclosure of organisations’ forward looking climate related risks.

In July 2015, France strengthened mandatory climate disclosure requirements for listed companies and introduced the first mandatory requirements for institutional investors as part of Article 173 of the Law for the Energy Transition and Green Growth.  These provisions require listed companies to disclose in the annual report “the financial risks related to the effects of climate change and the measures adopted by the company to reduce them, by implementing a low-carbon strategy in every component of its activities.”  Institutional investors will also be required to “mention in their annual report, and make available to their beneficiaries, information on how their investment decision-making process takes social, environmental and governance criteria into consideration, and the means implemented to contribute to the energy and ecological transition.”  The law also requires the government to implement stress testing reflecting the risks associated with climate change.

This trend towards greater disclosure and open assessment of climate-related risks is likely to continue across Europe.

These four reasons suggest that energy efficiency should be on the board room agenda of financial institutions.  Whatever the markets they operate in there are growth opportunities as well as opportunities to reduce risks.

A recent article entitled “All Lenders must be green lenders” by friend and EnergyPro collaborator in the US Sean Neil emphasised an important aspect of green and energy efficiency financing that often seems to be forgotten and which we have been writing about for a while.  This is how do we ensure that all lending is green, or in the specific case of energy efficiency, how do we all ensure all financing achieves the optimum levels of energy efficiency.  This text draws upon the EEFIG Underwriting Toolkit and work I carried out for KAPSARC on financing energy productivity.

Every working day loans, mortgages, leases and investments are made into new buildings, building refurbishments and modernisation as well as upgrade and replacement of industrial processes and production plants.  In nearly all cases, energy efficiency is not the primary purpose of the investment being financed but the future levels of energy efficiency are effectively being decided and “locked in”, in some cases because of the long life of major assets for many decades.  Although new buildings, refurbishments or new production plants generally achieve higher levels of efficiency than the units that they replace due to a) improved technologies and b) tighter regulations and codes of practice, many cost-effective opportunities to improve energy efficiency are missed.  This occurs due to a number of reasons including; lack of knowledge on the part of project hosts, time pressure, the conservative nature of engineering design, and treating regulations as a target that have to be achieved rather than a minimum level of performance.  Banks and financial institutions can play an active role in ensuring financed projects of all types achieve optimum levels of efficiency over and above business as usual by adjusting the lending/investing process to include queries about energy efficiency and the provision of assistance to identify viable projects.  By doing this they can both reduce risks, by financing measures that improve customers’ cash flows, and potentially increase lending.

The EBRD has long been a pioneer in exploiting the opportunities provided by everyday, non-energy efficiency lending activities.  As well as specialised efficiency projects the EBRD checks all industrial or commercial loan applications to assess potential for energy efficiency improvements.  The bank then works with the client organisation to develop the priority projects and these are incorporated into the loan application.  This process ensures that all commercially and financially viable improvements are incorporated, improves the client’s cash flow (which reduces the lending risk) and increases the capital deployed.

In commercial real estate funding for the acquisition or refinancing of a building an investor or lender will typically review the building’s financials, rent roll and history and require a Physical Needs Assessment (PNA) or comparable review. It can be a relatively simple matter to make energy efficiency assessments and ratings such as Energy Performance Certificates part of that PNA, and even to make performance standards part of a lender’s requirements.  Some banks including ING and ABN Amro have implemented these kinds of programmes and are going further by providing tools to assist owners to identify energy efficiency measures.

ING Real Estate Finance (ING REF) set an ambition of reducing CO₂ emissions from its Dutch portfolio by 15-20% with a target of energy cost savings of EUR 50 million per year.  This entailed targeting 3,000 Dutch clients with 28,000 buildings.  ING paid for the development of an app which was offered to all clients – the app provides an analysis of the clients energy use across their portfolio and identifies potential energy savings.  If the potential energy savings exceed EUR 15,000 the client is offered a free site energy survey.

ING REF also provides advice to clients on what subsides are available (through a specialist third party) and ING REF offers 100% finance for energy efficiency improvements from ING Groenbank with a 0.5% discount on normal interest rates.  Within the first two years, the app was used to scan 18,000 buildings with a total floor area of 10 million m² (65% of ING REF’s portfolio).  ING aims to roll out the app to other European countries.

The important thing here is that, as Sean says in his article, just by making small adjustments to existing processes for lending and investing, banks and investors could have a significant effect on future levels of energy efficiency, as well as identifying additional opportunities to lend and to reduce risks.  Banks and investors need to ensure all projects they back, in whatever sector they are, real estate, industry, infrastructure, transport or energy supply, incorporate all cost-effective energy efficiency measures.  If they don’t they are aiding and abetting developers and operators to lock in unnecessarily high levels of energy waste for the foreseeable future, sometimes even for decades.

The 22^nd June sees the launch of the EEFIG Underwriting Toolkit – a major new publication aimed at assisting financial institutions build capacity in financing energy efficiency, particularly in regard to understanding and appraising the value and risk of energy efficiency projects.  As its primary author, assisted by a great Consortium and input from many EEFIG members and others, it will be good to get the Toolkit into the market place after a year of work on it.  Although primarily aimed at financial institutions looking to deploy capital into energy efficiency it should also be of use to project developers who can use it to develop projects more in line with the needs of financiers, and CFOs reviewing possible corporate energy efficiency investments who often face the same issues as external providers of capital.

With growing interest from financial institutions in financing energy efficiency projects, and increased recognition that investment and financing of energy efficiency has to grow by a factor of five by 2050 for us to have any chance of meeting our climate goals, it is time to address the elephant in the room on energy efficiency – performance risk.  Recent articles in the UK press have highlighted the inadequacies of energy modelling, the performance gap between what a project is supposed to save and what it actually saves. Similarly in the US there has been disquiet about a number of PACE funded projects not performing.

The energy efficiency industry needs to come clean about performance risk and banks and investors contemplating scaling up capital deployment into efficiency need to understand the issue.  This does not mean don’t invest in efficiency, or that it is high risk, it just means we need to really understand and where possible mitigate the risks.

So far most financial institutions have studiously ignored performance risk for the apparently rational reason that they are not taking it, or at least they think they are not taking it.   Most energy efficiency financing at the moment is straight forward consumer or commercial lending, just and just like any other loan the borrower is on the hook for the payments come what may.  The next largest area of efficiency financing is funding investments made under an Energy Performance Contract (EPC) where an Energy Service Company (ESCO) provides a guarantee that the predicted level of savings will be achieved and if they are not, pays the difference.  So assuming the ESCO is experienced and credit worthy all is well for the bank, the project fails to deliver, the ESCO pays the client and the client pays back the bank.

However, things are really not that simple and even when financial institutions are not explicitly and contractually taking the performance risk they should be concerned about it for six good reasons:

• depending on jurisdiction consumer credit law it may make a lender responsible for equipment performance over its lifetime.
• under-performance can lead to customer dis-satisfaction which leads to disputes which put repayment at risk. They also consume time and energy on both sides and create a negative customer experience which these days can be quickly communicated and can cause reputational damage.
• some financial institutions count the improved cash flow resulting from the projected energy savings in their credit risk assessment. Even though they do not contractually take credit risk this means that they are implicitly taking performance risk, if the savings are not delivered the customer’s credit risk is higher than the assessed number.
• failures of project performance at scale in residential financed projects may lead to reputational loss, even a mis-selling scandal. In the US and UK there has been negative press about the performance of energy efficiency retrofits. Imagine if a bank financed millions of retrofits on the promise of savings being greater than repayments and they were not delivered, the reputational risks and the cost to rectify would be huge.
• a better understanding of performance risk will allow development of new products which take some performance risk for higher returns. This has started to happen in wind power for instance where lenders who previously would take no performance risk are now taking some for higher returns.  Done right energy efficiency can be highly profitable and secure so there is an opportunity for a funder who really understands the risks.
• re-financing markets, specifically the green bond market, will require assurance that underlying projects are performing and having a genuine environmental impact. The green bond market is imposing more stringent standards on what qualifies as green.  In order to attract the most investors at the best rates it is important to be able to prove that the underlying projects are actually performing as they were supposed to.

These six reasons mean that financial institutions active in, or contemplating entering the energy efficiency market really do need to understand and manage performance risk.

The Investor Confidence Project (ICP) is an international project to reduce performance risks and due diligence cost through the standardisation of energy efficiency project development.  Under the ICP’s Investor Ready Energy Efficiency™ system, accredited project developers, who have to be highly qualified and experienced, develop projects following the ICP’s Protocols which are then independently reviewed by an ICP Quality Assurance professional.  Projects that receive the Investor Ready Energy Efficiency™ certification have followed international, transparent best practice and therefore will have lower performance risk and financial institutions can spend less on due diligence – lenders and investors, as well as CFOs, can have more confidence in them.  They also have on-going Operations & Maintenance and Measurement & Verification plans both of which help to maintain savings through the life of the project.  Standardisation through the ICP will also enable aggregation which is necessary in order to utilise the debt capital markets.

ICP has Protocols available to use in the buildings sector, both tertiary buildings and apartment blocks in the US and Europe.  Protocols for industrial efficiency projects, street lighting and district energy are under development in Europe with the support of the European Commission’s Horizon 2020 programme.  Project Developers can get training and become accredited – helping to give customers more confidence in their projects.

Financial institutions looking to deploy capital into energy efficiency should engage with the Investor Confidence Project and require its adoption from their project developers and project hosts.

More details on the ICP: europe.eeperformance.org

The ICPEU and I3CP projects have received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 649836 and 754056. The sole responsibility for the content of this document 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.