Energy efficiency is a 'win-win' for investors
Between now and 2050, the biggest contribution to global emissions reduction has to come from economy-wide energy savings. But investment levels in energy efficiency (despite modest rises) still lag those in renewable energy generation by a large margin. And the International Energy Agency (IEA) estimates that global investment in energy efficiency needs to reach $1 trillion per year. The current level is around $221 billion, so that is a fourfold to fivefold increase — with current technologies.
What makes the investment deficit in energy efficiency strange is that, in most cases, it's a much more reliable investment than generation with a much quicker payback period. The Energy Efficiency Financial Institutions Group (EEFIG) is in the process of uploading another several thousand individual energy efficiency projects into our open source database (DEEP), taking the total to over 10,000 individual projects from all over Europe in the next month. We are yet to publish a full analysis of the financial return on the recently added projects but we fully expect them to show similar results to those we published last year (based on 7,800 projects).
The headline figure from that analysis was that, for residential investments, the median price to save a unit of energy (3 cents/kWh) was over eight times lower than the average retail price to consume one (24 cents/kWh, based on the latest EUROSTAT averages for EU-28 retail energy prices). For industrial projects, meanwhile, the numbers were an average of little over 1 cent of investment needed to save 1kWh alongside nearly 12 cents to consume one. This is a huge differential and sees a median payback period of just two years for investments in industrial energy efficiency. This compares to an average payback period of around 10 years for a typical investment in a corporate renewable energy project.
Investment levels in energy efficiency still lag those in renewable energy generation by a large margin.
So why isn't investment pouring into more retrofit projects? Without a doubt, the most important factor is the lack of specific tools to enable financial institutions to better understand, value and monitor the performance of energy efficiency investments so they can design and price much more appropriate financial instruments for their clients. Banks and other financial institutions also need a massive retail and commercial scale-up.
When I worked at JP Morgan, colleagues and I knew the importance of having the right tools to reduce complexity and facilitate internal approvals. Essentially, the amount of time and energy (especially internal approvals) required to do a $1 billion transaction was often similar as for $100 million, or even for a $10 million deal. Investors are naturally centered on risk and return, so we have to focus like a laser on getting these metrics clearer for energy efficiency.
In financial terminology, what we need is a great deal more analytical resources to allow intermediaries (aggregators) to group securities into baskets so institutional investors and investment banks easily can invest in them, ideally as low risk, investment-grade assets. It also would help if investments (green bonds or specifically designed loans) and individual balance sheet assets were "tagged" with their energy performance and energy efficiency characteristics so their performance can be better tracked across the whole portfolio.
Transparency and financial confidence go hand in hand. Pushing for them was the reason the European Commission and the U.N. Environment Finance Initiative (UNEPFI) set up EEFIG in 2013. EEFIG's mission is to de-risk investments in energy efficiency, working with over 120 contributing experts from every part of the financial sector.
The median price to save a unit of energy was over eight times lower than the average retail price to consume one.
We have had to move fast. There is an increasing amount of legislation around energy efficiency standards (at both EU and member state level), meaning that a large number of inefficient commercial buildings need investment as soon as possible if they are not to lose their income streams or see them interrupted. For example, in England and Wales it will become unlawful to lease a commercial building with an Energy Performance Certificate rating below E on April 1. France also has tough new national standards coming in.
Last month, the Commissioner for the Energy Union, Maroš Šefčovič, launched EEFIG's new Underwriting Toolkit for the many financial institutions currently reviewing and establishing internal procedures to review and approve energy efficiency projects. The Toolkit has been designed with the input from over 20 of these institutions. In conjunction with the DEEP database, the toolkit provides information aimed specifically at the different units and individuals within financial institutions whose task is to evaluate, assess, approve and process energy efficiency transactions.
At the moment, about 85 percent of all energy efficiency investment has been financed through existing sources of finance or self-financed, rather than with specific energy efficiency products. This will change as financial institutions tailor financial instruments to enable new business models for energy efficiency in buildings and industry. We can increase profitable energy efficiency investments fivefold, and with increased ambition from EU Member States and G20, I am confident that we will.
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