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Will Energy Efficiency Become a New Investment Class?

by | published October 9th, 2015

We don’t usually think of the European energy sector as being the testing ground for a genuinely new energy investment initiative. But that may be changing… and fast.

Over the past two weeks, word has emerged that moves to the more efficient use of energy are now the new darlings of European investment houses. As Clare Anne Taylor wrote for CleanTechnica late last week, “Energy efficiency is the new black.”

So what’s holding the banks back from piling in en masse? The problem hardly seems to be raising the funds. Rather, the stumbling block is on the other end of the pipeline.

Here’s what’s holding back investments… how this barrier can be demolished… and how this development will affect everyday investors…

What’s Holding Investments Back

The obstacle checking these investments is simply this: Doable projects are just not available.

As Taylor noted in her October 1 article:

In theory, it’s never been so easy to access finance for energy efficiency. Germany’s public investment bank, KfW, committed a total of €16 billion [$18 billion] to energy efficiency in 2013, and the European Investment Bank (EIB) provided €2.1 billion across the European Union. France’s Caisse des Dépôts committed €453 million to energy efficiency in 2012 and the United Kingdom Green Investment Bank provided €181 million. Green investment banks are also being established (and have energy efficiency as a target sector) in Malaysia, South Africa, Australia, Japan, the United Arab Emirates, and the United States. Many energy efficiency funds exist at national and regional level across Europe and are set to be boosted by a whopping €38 billion via the European Structural and Investment Funds allocation to the low carbon economy between 2014 and 2020. In 2012, global energy efficiency investments across all sectors totaled $310 billion, representing a very significant and growing market opportunity for investors and businesses.

Leading financial institutions are increasingly aware of the opportunities. According to Urs Rohner, Chairman of Credit Suisse Group AG, “Our research demonstrated that Europe can probably save another 10 to 15% of energy by 2030 with appropriate energy efficiency measures with no negative impact on economic growth. We therefore believe that more efficient energy will have double benefits, to Europe’s environmental and economic growth targets.”

Yet investment funds and environmentally oriented banking institutions are still awaiting a clear focus on the project side.

Much of this is because, while in principle efficiency is an obvious advantage, separating it from developments that emphasize primarily a particular alternative or renewable source such as solar or wind power is proving difficult.

The Entire Energy Sector Must Be Considered

Now, there is certainly nothing wrong with pushing a renewable alternative as a more efficient utilization of energy delivery. But again, there’s another stumbling block here: While solar or wind projects are emerging in greater numbers in Europe, they are also requiring huge outlays to connect to existing grids and delivery networks.

The greater need is found in addressing efficiency considerations from the entire energy sector – both new and traditional sources.

Already there are pilot projects and entire national initiatives in a number of EU countries for the expanded use of smart grids, better building techniques, and more enlightened ways of using energy in daily life. At the end-user side of things, the changes are evident.

Last month, I had the opportunity to evaluate some of these changes during travels that carried me through Germany. While costs are still high, an average new structure in, say, Frankfurt uses energy more efficiently than its equivalent in the U.S. But there is a limit to how much one can rely on only consumer usage to affect a genuine improvement in efficiency ratios.

For that to happen, a much more expansive upstream (energy production and generation) to downstream (from distribution to consumption) improvement needs to take place. This will not happen as long as the efficiency portion of the equation is still regarded as an outlier.

The Investment Market Will Lead the Way

It is here that the Investor Confidence Project (ICP) Europe approach may finally make a meaningful difference. In the process, a bridge to parallel approaches established in the U.S. may actually provide greater access to funding. The intention here is nothing less than to establish the financial environment allowing energy efficiency to come into its own.

Taylor explains:

Five years ago, the NGO Environmental Defense Fund originated the Investor Confidence Project to contribute to market development for energy efficiency renovation projects by streamlining transactions and increasing the reliability of projected energy savings. The intention: to build a marketplace for standardized energy efficiency projects. The idea is that individual projects can then be aggregated and traded by institutional investors on secondary markets – just like mortgages or other profitable asset-backed securities.

Already, ICP has gained traction in the United States through inclusion in federal and bank lending programs, and this summer the Building Owners and Managers Association (BOMA) International announced the relaunch of its BOMA Energy Performance toolkit based on the ICP standards.

ICP Europe, led in part by Senior Advisor Dr. Steven Fawkes, launched earlier this year. Already, the ICP Europe project consortium is attracting political and financial support, including €1.92 million from the European Commission’s Horizon 2020 program.

Fawkes certainly knows his stuff – he’s a member of the Investment Committee of the London Energy Efficiency Fund and comes with 30 years’ experience of energy efficiency, including founding two energy service companies.

“Governments and NGOs have for years been talking about how energy-efficiency is the low hanging fruit, often bringing a healthy return on investment,” says Steven. “But, despite the actions of a few market leaders such as M&S, investing in it is clearly not as easy as it’s made out to be, otherwise everybody would be at it. We want to change that. We want to make it become an indispensable part of every institutional investor’s portfolio.”

On September 14, ICP Europe released its first-draft protocols on large tertiary (non-domestic) buildings and standard tertiary buildings for review. The ICP Europe Protocols are an industry best practice assembly of existing European and national building energy renovation standards, practices, and documentation aligned to create the data necessary to enable underwriting and managing of energy performance risk. The protocols are open-source and can be used by anybody in the market at no cost.

This may be the most important element. To the extent that ICP Europe is able to take off, it will be the investment market,not government, that will be leading the way. Efficiency paired with profitability is the real goal here.

And it just may provide a new class of opportunities for average investors on both sides of the pond. I’ll keep you alerted.

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