Columnists: Brook Riley, Rockwool International

Published on: 21 Apr 2017

Show me the money! Financing energy efficiency

Show me the money! It’s Tom Cruise’s famous quote in Jerry Maguire. And though they use more diplomatic language, the government and European Parliament negotiators debating the EU energy efficiency and buildings directives take the same line. There is far more awareness than before of the benefits of higher ambition – climate action, jobs, better living conditions, energy security – but there is also concern about how to pay for it.

Understandable? Yes: negotiators are reluctant to sign up to more ambitious legislation unless they're confident they can meet it. Yet – surprise discovery – the finance world is just as keen to invest in energy efficiency as the negotiators are to attract new capital. There are many workable investment solutions; they just need to be promoted and scaled up.

Take PKA, a Danish pension fund, managing 33 billion euros for 275,000 members. It's goal is to invest 10% of its funds – €3.3 billion – in energy efficiency and renewables by 2020. PKA is currently chairing a group of about 130 pension funds called the IIGCC – the Institutional Investors Group on Climate Change – which represents a staggering 18 trillion euros (that's 18,000,000,000,000, or much more than the EU's GDP). Think what would happen if all IIGCC members matched PKA's 10% investment commitment.

Or take ING Belgium. In February, it launched an advertising campaign – with billboards around Brussels and adverts on ATM screens – to promote low interest loans for homeowners to improve the energy efficiency of their houses or flats. ING offers up to 50,000 euros at an attractive 1.95% over a maximum of ten years. Meanwhile, in the Netherlands, Rabobank (one of the country's biggest) offers a below-market interest rate if homeowners commit to making efficiency improvements (more details in this eceee briefing). Their logic? Saving energy cuts bills and increases property value, so there's less risk people will default on the loans, and the banks can always claim the property in compensation if they do. ProCredit in Bulgaria offers a similar deal.

Then there’s LABEEF, the Latvian Baltic Energy Efficiency Facility. It specialises in buying energy management contracts from energy service companies, or ESCOs. Soviet-era apartment blocks make up a big part of the housing stock in Central and Eastern Europe. Most will last for decades, but like many 1970s blocks in Europe, they are not energy efficient. LABEEF noticed that ESCOs were funding high quality, in-depth renovations, then being repaid by the flat-owners over a 20 year period – the standard ESCO model – but were unable to use these payments as collateral for new bank loans to finance new projects, because banks judged the model too novel and risky. The result: the ESCOs were stuck, couldn't pay their workforce and risked bankruptcy. Enter LABEEF, which buys the 20 year contracts – and the regular payments from the flat-owners – from the ESCOs, which are now able to finance new renovations.

All this is good, but the negotiators can make it bigger and better. The financiers say ambitious EU energy efficiency legislation will increase demand for low interest loans like ING’s, boost the market for energy service companies, stimulate more initiatives like LABEEF. Every year, PKA has to compile thousands of pages of analysis to show the Danish financial regulators that energy efficiency is a safe investment. Many pension funds cannot or do not want to put themselves through the same process. Binding legislation cuts their risks and costs. It can tip the balance between an investment being rejected or going ahead.

As so often, the main issue seems to be lack of communication. Negotiators are reluctant to support higher ambition without clear evidence that there will be additional funding, even as investors need more ambitious legislation to justify providing the money. If the energy efficiency community can bring the finance and policy worlds together – and we can! – higher ambition will be on the cards. The key is getting decision makers to see that far from setting themselves up to fail by supporting higher targets, they are making their goals easier to meet. Their reward: the huge socio-economic and environmental benefits of energy efficiency.

Other columns by Brook Riley