Columnists: Caroline Milne, Joule Assets Inc.

Published on: 8 Feb 2019

What if all energy efficiency projects were financed?

Recent studies show that market potential for energy efficiency across Europe continues to grow; most countries have a market potential of at least a few billion euro annually.  In Ireland, for example, it is estimated that to reach their 2020 energy efficiency targets, an investment of €3 billion will deliver a Net Present Value (NPV) of €8 billion in savings.  More broadly, the EU Commission estimates that “the mobilisation of an extra €177 billion from public and private investment sources is needed annually from 2021 to 2030 to reach the 2030 climate and energy targets.”

But the market has lagged due to high due diligence costs blocking access to capital and complicating project finance. We know that fund managers successfully finance only 5-15% of all energy efficiency projects reviewed. This is a significant upfront cost, reducing overall profit. On the demand side, project developers often self-finance their projects or use bank loans, because the perception is that it is too difficult to access appropriate finance.

But what might happen if all viable projects were able to access finance?

To address this question, we at Joule Assets Europe decided to provide financing solutions and strategic support for ‘Energy Reduction Assets’, including energy efficiency, distributed renewables, storage, and building control measures. Our online platform, eQuad, provides access to third-party project valuation, performance insurance, project certification, due diligence, and introductions to prequalified capital sources in the form of off-balance sheet financing. The work of eQuad is carried out by Joule Assets Europe, in partnership with ICP Credentialed Quality Assurance Provider, Verco Global, and internationally recognized insurance provider, HSB Engineering Insurance Ltd.

eQuad is open to projects of all sizes – this can be very small, from well below the €100k range, to in the several millions. This depends largely on the specific requirements of investors within our network and the finance they have available at any given time (keeping in mind they are each at different stages in their funds, so there is rarely a fixed state of “available” finance – it is rather fluid).

In general, for one of the smaller projects to get financed, it should be bundled in a portfolio, usually of at least a million, of similar small projects, that the Energy Service Company (ESCO) is selling using the same, standard contract. For these smaller projects, the more repeatable they are in terms of client/building type, Energy Conservation Measures (ECMs) used, and the ESCO-client contract, the easier it will be to sell to an investor as a package.

We launched the platform commercially in Q2 of 2018 (May), and by the end of Q3, we had a project pipeline with a value of more than €160 million. This really exceeded our expectations – and also confirmed to us that despite the barriers, the market potential is very real.

Participating in the Sustainable Energy Investment Forums has been instrumental for us in getting to know local energy efficiency markets and local actors. It has also shown us that, while each market has its own specificities (whether legislative, related to buildings or other), most Member States are facing similar issues in increasing demand for energy efficiency by end users, and in transforming energy efficiency into a product/service that people want to invest in.

Not surprisingly, sales remains a major struggle for small ESCOs. This is usually related to two key issues: The first being the fact that energy consumers (ESCO clients) do not have strong enough incentive to invest in energy efficiency. Energy efficiency is simply not on the priority list for most companies, or if it is, it can very easily get pushed down to the bottom – selling an energy efficiency upgrade/service usually takes a minimum of 12 months for an ESCO.

The European market still needs appropriate regulation, including:

  • EU-wide standardization of energy performance certification
  • EU-wide financial classification system for energy reduction projects, to facilitate investments across technologies and mitigate risk for investors approaching the environmental sustainability.
  • A commonly accepted, cross-country ESCO certification, to create trust between project developers and end-clients. This could be ICP, however greater market uptake is needed here, across EU member states.

At the national level, we’d like to see better use of public funds, that can work as a guarantee for private investments for small to medium-sized projects which are still perceived as risky.

For example, in Italy, Medio Credito Centrale (MCC) has a guarantee fund offering up to 80% guarantees to SMEs, co-investing with other private financial institutions. This is particularly used for projects in Southern Italy where it is harder to find investors.

We’d also advocate for incentives and public programs to support innovative financing options: such as on-bill financing, on-tax financing (Property Assessed Clean Energy - PACE), crowdfunding, and Energy Performance Contracting (EPC).

Unless at the policy level, energy efficiency is considered an absolute MUST, as opposed a “nice to have” luxury item, Member States, and their small businesses working in the energy efficiency space, will continue to struggle.

 

 

 

The views expressed in this column are those of the columnist and do not necessarily reflect the views of eceee or any of its members.

Other columns by Caroline Milne