Energy Efficiency Investment: Is Europe Open for Business?
So far the European Commission recent climate and energy proposals lack a 2030 target for energy efficiency. In this ManagEnergy interview Dr Steve Fawkes, author and entrepreneur, talks about how to unlock the energy efficiency value opportunity.
Q: Your blog is called ‘Only Eleven Percent’? Why?
A: The 11% referred to in the blog title is the useful energy services we use (light, heat, transport, sound etc) compared to the primary energy input. We can never achieve 100% due to the laws of thermodynamics but we can certainly improve a long way, probably 25 to 50%. Therefore we could aim for say 15%. The world spends $6 trillion on energy, 10% of global GDP, a 10% saving equates to $600 billion p.a.
Q: Where do you see the biggest opportunity for savings?
A: 40% of global energy use is in the built environment and so there is a huge potential for savings within buildings of all kinds. In order to exploit this resource (and it is best to think of efficiency as a resource) we will need to mobilise external, private finance. Traditional efficiency has been thought of as a public good that needs to be funded by the public sector but this is out of date as a) public finances are under real constraints and b) the scale of the opportunity is too big.
Q: How do we unlock these savings?
A: One of the fundamental issues around energy efficiency financing is the small size of projects. Even a major retrofit for a large hospital may only account for £10 to £20m capital maximum, many projects will be £1 to £5m and in other sectors most projects will be measured in thousands or perhaps hundreds of thousands of pounds. This is a major problem as low cost finance from the debt capital markets requires massive volume, typically £200 to £300m plus. There is a major opportunity for aggregators to standardise and bring together multiple small projects. This is the single biggest challenge for energy efficiency financing.
Q: Can public authorities play a role here?
A: Local authorities and public agencies could act as aggregators of projects as long as they act commercially and don’t impose bureaucratic processes. We need to establish programmes that pay for the results we want i.e. kWh saved and not just for complying with a process.
Q: Is there a market for investment in energy efficiency?
A: Particularly in the US, there has been the realisation that energy efficiency in the built environment is a huge value opportunity. Deutsche Bank identified a $279 billion investment opportunity in US real estate energy efficiency retrofits. This realisation has opened up a whole new group of entrepreneurs and financiers who are working on developing & delivering innovative energy efficiency technologies, new contract structures and new financing methods.
Q: What do investors need in order to act?
A: Policy is an important driver, and policies such as the Energy Efficiency Directive and its national interpretations will increase the pressure on building owners, both private and public, to increase the rate of building retrofits.
Standard contracts, due diligence and investor-ready projects are vital. An important initiative for standardisation in the USA, and which we are bringing to Europe, is the Investor Confidence Project (ICP). The ICP develops protocols for different types of buildings that standardise the process and documentation related to developing a project. This can reduce transaction costs and ultimately enable the secondary market through the debt capital markets which require standardisation. In addition over time it will produce actuarial data on project performance. The ICP is gaining traction in the US and we expect to bring it to Europe in 2014.
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Photo Credit: Europe and Energy Investment/shutterstock