Increasing the flow of investment into energy efficiency in industry
The most recent EEFIG meeting focused on industry, a sector that is sometimes neglected compared to buildings. I summarised the work on the EEFIG Underwriting Toolkit and took the opportunity to give a few remarks on how to increase the flow of investment into energy efficiency in industry.
When talking about energy efficiency investment we often assume we are talking about third party, external investment from banks or funds but the reality is that most efficiency investment is internally funded. The EEVS survey in the UK shows that over 5 years only 5% of projects were financed by third party finance. The IEA energy efficiency report shows that global energy efficiency investment in 2016 grew 16% to $231 billion but in the business sector only 25% of that was provided by debt, and the ESCO market is only 12% of the total investment. The reality is that most of the time the investor is the CFO, in fact even if projects are externally financed the CFO will always be a key decision maker. CFOs have exactly the same issues around energy efficiency that external investors have, namely:
lack of expertise;
lack of certainty around the results.
Given the importance of CFOs and the fact that that have the same issues as third party investors the EEFIG Underwriting Toolkit should be useful for them. EEFIG should consider how best to distribute it to the CFO community, possibly through accounting institutes such as the Institute of Chartered Accountants in England & Wales and similar organisations in member states, and not forgetting CFOs in the public sector who often have their own institutes and networks.
Although people often criticise the fact that industry typically insists on a two year payback period for energy efficiency the reality is that it can be entirely rational to do this given:
uncertainty in outcomes;
uncertainty about future demand / production levels / product types / markets or even production locations;
the existence of more strategic investments such as new production plant, new products or marketing.
The excellent work of Catherine Cooremans highlighted that energy efficiency is not usually strategic. In any organisation things that are considered strategic are much more likely to be invested in and usually have longer payback periods.
In recent years we have recognised that energy efficiency brings many other benefits than just energy and energy cost savings. These benefits can include increased asset value, increased productivity, increased health and welfare and many others. These types of benefits are often much more strategic and interesting to decision makers than just energy cost savings. These benefits have long been neglected in building business cases because the energy efficiency industry focuses just on energy savings – invest x and save y. We have standardised and mandated energy audits but they of course just focus on energy, the standards were developed by energy efficiency experts. We need to work to improve the quality of business cases and ensure they include all the benefits. We now have standardisation in the technical aspects of energy efficiency projects, in the form of the Investor Confidence Project and its Investor Ready Energy Efficiency™ project certification system, and an approach to value and risk appraisal in the form of the EEFIG Underwriting Toolkit. The next piece of the jigsaw is a common approach to building better business cases from beginning to end, that means from idea generation right through to commissioning and Measurement & Verification plans.
Another aspect in industry is the fact that the idea of outsourced energy services has not generally been accepted in industry whereas outsourcing IT or vehicle fleets is accepted. Where it is present it is usually confined to ancillary services like boilers and compressed air systems. We need to encourage knowledge about the benefits to outsourcing energy services and the know-how to implement such projects.
The reality for most industrial companies is that if they have a need for external finance they are most likely to approach their own relationship bank rather than a separate entity such as a specialised energy efficiency fund. We need to work to ensure that the banks that service the industrial sector see the benefits for them which are risk reduction and a new business opportunity.
Finally when we talk about energy efficiency investments we tend to focus on retrofit projects but every day hundreds or even thousands of investment decisions on new production lines, expansion, new production facilities are taken. These are what I call “normal” investments. New plant will inherently be more efficient than older technologies and facilities they replace because of tightened regulations and improved technology. We know however that for many reasons, lack of know-how, time pressure etc., many cost-effective investment opportunities to maximize energy efficiency are missed. To address this we definitely need to build capacity in end-users and consultants around high efficiency design techniques such as integrated design. Proper use of integrated design has been shown by Rocky Mountain Institute and the excellent Sustainable Energy Agency’s Energy Efficiency Design programme to significantly reduce energy costs and capex as well. We also need to help banks ask the right questions by adopting processes like EBRDs, and like ING have implemented for real estate, in which customers asking for finance for new facilities are asked about energy efficiency levels. If banks are to contribute to climate goals they should only be funding improvements and new facilities that move beyond “Business As Usual” improvements.
To summarise; to increase the flow of investment into energy efficiency we need to:
build capacity within CFOs as well as banks to help them better understand and evaluate the value and risks of energy efficiency projects;
to do this governments and the EU can promote the use of the EEFIG Underwriting Toolkit within financial institutions and corporate board rooms.
build the case for outsourced energy services to make them as common as outsourced IT or vehicle fleets;
trade associations and providers need to build and promote the case for energy outsourcing. Governments and the EU can help in this.
work to improve the building of better business cases through guides and training emphasising strategic non-energy benefits;
the EU could support the development of a guide to building better business cases. This will build upon the work that the EU has already supported to roll out the Investor Confidence Project and the EEFIG Underwriting Toolkit.
drive the standardisation of the development and documentation of energy efficiency projects through best practices and certification programmes such as the Investor Confidence Project’s Investor Ready Energy Efficiency™;
development banks and other funders, including providers of grant funding for energy efficiency such as the EU and member state governments, should insist upon using best practices and certification programmes.
demand that all projects have Measurement and Verification (M&V) and that real performance data is collected and analysed – over time this will create the data for proper risk assessment;
again, all development banks and grant funding should insist on M&V. We can no longer implement projects that don’t generate performance data;
even now many projects are being funded without insisting on M&V, even projects that are supported by the EIB and by European grant funds. This is no longer acceptable.
improve capacity around integrated, high efficiency demand, both amongst customers and consultants as well as the financial community;
using “off the shelf”, BAU designs for new facilities and buildings should no longer be acceptable.
equip mainstream financial institutions to ask the right questions around requests to fund new facilities in order to maximise the uptake of cost-effective energy efficiency opportunities that are often missed today.