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Building the energy efficiency marketplace

“Our study shows that the right efficiency policies could alone enable the world to achieve more than 40% of the emissions cuts needed to reach its climate goals without requiring new technology,” said Dr Fatih Birol, Executive Director of the International Energy Agency (IEA), commenting on the IEA’s market outlook on energy efficiency, published on 19 October.

Energy efficiency’s potential is well-established: a previous IEA report, World Energy Outlook 2017, showed that when combined with other measures, efficiency could realise over 40% of the carbon emissions reductions required to meet global climate change mitigation goals, the largest single contribution.

This year’s report has a new feature, the Efficient World Scenario (EWS), showing what would happen if all available energy efficiency measures were implemented between now and 2040. All these measures are cost-effective, based on energy saving alone, and use technologies that are readily available today.

In this scenario, annual investment in efficient buildings and appliances rises from USD 140 billion (United States dollars) in 2017, to an average of USD 220 billion up to 2025, and then to USD 360 billion to 2040. Furthermore, “the magnitude of the savings achieved in the EWS would make the climate change targets under the Paris Agreement and the UN Sustainable Development Goals (SDGs) much more achievable” according to the report.

However, despite the economic and societal returns, investment is not currently on track to achieve this kind of scale. Global energy efficiency investment grew only marginally in 2017 (up by 3% to USD 236 billion). About 60% of total efficiency investment is in the buildings sector, and it is this sector that the report highlights as ripe for “finance and business model innovation” that can drive the scale of investment needed. According to the report, “one factor favouring greater levels of investment is the replicable and scalable nature of building energy efficiency projects that have predictable returns and can be aggregated to appeal to third-party financiers.”

In terms of financial incentives, the largest part (48%) of public spending on energy efficiency is in the form of grants and subsidies, followed by tax relief and credits (31%). The report notes that: “the strong preference for grants and direct subsidies may reflect the fact that policy makers are familiar with them and that they are easy to administer and communicate.” The case for overall subsidy reform is highlighted: in the countries surveyed by the report, total spending on fossil fuel consumption subsidies amounted to USD 103 billion in 2016.

The report cites white certificates and energy efficiency obligation schemes as examples of the kind of market-based instruments that can scale investment – and give good value for money to the public purse. Investment volume generated by MBIs has increased six-fold over the last ten years, with the majority of MBIs achieving public/private leverage rates of up to 200%, meaning that for every dollar of public investment, two dollars of private sector investment is triggered.

Europe accounts for 30% of total global investment in the buildings sector, according to the IEA report, and the emerging energy efficiency market in the buildings sector was estimated in 2015 at €109 billion in EU 28. European policy drivers include overall energy efficiency targets, energy efficiency obligation schemes, and regulation related to minimum energy efficiency standards (‘MEES’, formerly known as Minimum Energy Performance Standards or 'MEPS'), which in some countries make it illegal to let energy inefficient properties.

Dr. Steve Fawkes, a global energy efficiency expert, comments: “In the UK and Netherlands real estate sector, the regulations on MEES will render a significant proportion of financed assets at risk of becoming stranded and non-financeable. This is a wake-up call to investors in real estate.”

“Mere energy cost savings is not enough”

Fawkes is also an advisor to the Sustainable Energy Investment Forums, a European Commission initiative working with national authorities across Europe to boost investment and financing for sustainable energy.  “To create a real marketplace for energy efficiency, we have to improve the quality of supply and demand,” says Fawkes. “This means addressing what I call the jigsaw of energy efficiency financing.  Addressing one piece does not work,” he adds.

According to Fawkes, the different pieces of the puzzle include: standardization, finance for both projects and for development, large-scale project pipelines, and building supply-side capacity along with boosting demand. On this last point, Fawkes explains: “More people need to know what to ask for, and what the benefits of energy efficiency are - especially the more strategic and more attractive non-energy benefits (NEBs).  Mere energy cost savings is not enough.”

The non-energy benefits highlighted in the IEA energy efficiency market outlook report include “those concerning the macro economy and public health […], including for employment, productivity, and the incomes of individuals and businesses.”

To date, the top non-energy benefit for investors is increased asset value in buildings, according to Peter Sweatman, task group lead for G20 on energy efficiency finance, and a regular speaker at the European Commission’s Sustainable Energy Investment Forums.  The asset value is, he says: “a result of the increased rentability, lower gap periods and reduced regulatory risks attached to high performing commercial properties. There is work underway [by non-profit Buildings 2030] to better capture health benefits and this is particularly interesting in the context of future low carbon cities and air quality concerns.” Other current research on evaluating and communicating NEBs is ongoing in the Horizon 2020-funded project, M-Benefits.

Fawkes comments: “It is hard to establish a standardised way of assessing the different types of NEBs in many situations.  I think the real challenge is to persuade people who develop and then assess projects that NEBs can have a monetary value and often it is much more than the value of energy savings. For example, a small reduction in absenteeism because a building is greener and more pleasant to work in will be worth much more than energy cost savings that result.  Increase in product quality from improving control of an industrial furnace will also be more valuable and more strategic, than the savings on gas consumption.”

In the DEEP end

Project promoters, banks, and financial institutions seeking to evaluate prospective investments, including non-energy benefits, can refer to the EEFIG Underwriting Toolkit, designed to assist financial institutions to scale up their deployment of capital into energy efficiency. Policy drivers for the financial sector “are very much linked to the recommendations from the Taskforce on Climate-related Financial Disclosures,” says Fawkes.

“These would be banking regulations that require financial institutions to assess and report climate-related risks, and already we can see that France, the Bank of England and others are heading this way. Also effective are regulations that allow banks to have lower capital reserves for certain types of assets e.g. “green” or energy efficient assets that have lower risk. This is a carrot as it allows them to make more money,” he adds.

Further evidence for returns on energy efficiency investment is available via the DEEP database , the biggest database of energy efficiency projects in Europe. Users can compare investments per country, per energy efficiency measure type, building or company type and performance verification method.

Ivo Georgiev, project manager at the consultancy business COWI, has been closely involved in the development of the database. He says:  "DEEP is a dynamic tool, which has an enormous potential to address challenges to energy efficiency investments currently faced by financial institutions, policy makers and other stakeholders.”

Project types range from “low hanging fruit” with short payback times and limited risk that can be handled by existing financing mechanisms, to large, complex projects in industry, “these often lose out in competition, particularly when multiple non-energy benefits are not recognized,” says Georgiev. The database continues to evolve: DEEP 2 will be developed during 2018-2022.

“The key thing here is to continue to talk about the existence of NEBs and get project developers and valuers/investors to include them in the economic assessment,” says Fawkes. “A few years ago, I was developing an energy efficiency project with a major company, and the project promoter within the company said he had got as far as persuading the CFO that NEBs existed - they just had an issue valuing them - so then it became a judgement call.  That is a good start but clearly it will be better if we can value them properly,” he adds.

Clare Taylor's picture

Thank Clare for the Post!

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Discussions

Matt Chester's picture
Matt Chester on Nov 14, 2018 2:23 pm GMT

Great writeup. I've always been a fan of the saying that energy efficiency is the 'invisible renewable energy' because the ability of efficiency policies to reduce overall demand are just as (if not, more) effective at minimizing GHG emissions from the power sector.

The frustrating part about building efficiency proposals, such as building codes and incentives for retrofits, is how long-lasting the building sector is. While cars and appliances are replaced every few years, meaning policies will see returns on emission savings in the short term, buildings last many decades or longer. That's not to say our time isn't well-spent on building efficiency measures-- quite the opposite. We need those policies to take effect ASAP-- take effect yesterday-- in order to be able to minimize the overabundance of energy going into the building sector in the coming decades+

Bob Meinetz's picture
Bob Meinetz on Nov 14, 2018 3:52 pm GMT

Clare, what evidence do you have the Energy Efficiency Marketplace, a $220 billion industry, doesn't generate more emissions than it prevents?

Ignacio Moreno's picture
Ignacio Moreno on Nov 28, 2018 3:19 pm GMT

OK, imagine you reduce energy consumption by 40% in buildings. If for a given country you have an estimate of energy consumption in buildings and an estimate of KgCO2/kwh you can have an estimate on emission savings. The problem is to estimate KgCO2 emissions per dollar spent in energy efficiency. You have dollars spent in stuff, salaries, services...

Instead, you have to do calculations for each particular procedure. For instance I estimate that the CO2 footprint of a new PVC window is fully amortized, in Madrid, in 5-6 years when used to replace an aluminium window. In general, when I have made such calculations, the procedures make sense and result in the reduction of emissions.

Richard Ford's picture
Richard Ford on Nov 26, 2018 5:53 pm GMT

If you look at processing industries that use large amounts of heat, such as pasteurization of juice and pasteurization of milk for cultured dairy products, the savings from energy efficiency are far higher, in the 50% to 80% range.  

Burning natural gas in an 85% efficient cogeneration system, vs burning coal at 32% efficiency, reduces carbon emissions by 81%. 

Including efficiency improvements from processing industries makes the potential carbon emissions reduction far higher than the authors projection from building improvements.  There is no need for more nuclear power and no need to pursue fantasies like carbon capture and sequestration. 

Matt Chester's picture
Matt Chester on Nov 27, 2018 6:33 pm GMT

I think you bring up great points about the industrial  efficiency gains that are possible, Richard. Typically when we're talking about the buildings sector emissions, conversation is restricted to residential and commercial buildings (where more people have the ability to make a difference, as they live/own/work in them), but industrial building emissions-- which I imagine are lumped in with the industrial sector's emissions counting sheets-- are ripe for opportunity, as well.

I wanted to ask about your comment that there's no need for more nuclear power because of the reduction in energy demand such efficiencies can afford. Are you talking about literally there's no need for more nuclear to be built, or would you say it can be cut out entirely in the short-term? My personal opinion is existing nuclear generation is critical for producing emissions-free baseload power, allowing coal plants to retire without affecting reliability in the time before renewables & storage are ramped up to a degree that can take over 100% of our needs-- but again, I'd love to hear your thoughts. 

Richard Ford's picture
Richard Ford on Dec 3, 2018 4:13 pm GMT

I think the first priority is to shut down coal plants.  Nuclear plants may have to be phased out at the ends of their lifetimes, unless greater progress is made implementing conservation and solar power. 

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